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Will debt restructuring deal advantage or disadvantage Zambian economy?

By DERRICK SILIMINA

As Zambia navigates the debt storm towards sunshine, economic pundits have welcomed the outcome of the deal done with Eurobond holders of over $3.5 billion.

The External Bondholder Steering Committee recently announced a conclusive agreement with the Government on a restructuring of Zambia’s (i) $750,000,000 at 5.375 per cent. Notes due 2022, (ii) $1,000,000,000 8.5 per cent. Notes due 2024 and (iii) $1,250,000,000 8.97 per cent with amortizing notes due in 2027 (collectively the “Eurobonds”).

The Zambia External Bondholder Steering Committee (the “Committee”) is pleased to announce that it has reached a conclusive agreement (the “2024 Agreement”) with the Government of Zambia (the “Government”) on a restructuring of Zambia’s (i) US$750,000,000 5.375 per cent. Notes due 2022, (ii) US$1,000,000,000 8.500 per cent. Notes due 2024 and (iii) US$1,250,000,000 8.970 per cent. Amortising Notes due 2027 (collectively the “Eurobonds”).

PricewaterhouseCoopers Zambia Senior Partner Andrew Chibuye says the outcome is significant as the bondholders are “the stickiest and most difficult part to deal with because it’s the debt that determines how Zambia is perceived on the international credit rating.”

“This will help rebuild Zambia’s credibility. What does credibility do? We start to rebuild confidence that parties want to come and invest in Zambia, parties want to come to do business in Zambia, as they start to see a different light, thereby boosting economic development,” Chibuye says. 

He notes that being in debt distress diminished the perception of the country by external and internal financiers, and by extension citizens as well, thereby suppressing socio-economic investments.

Chibuye emphasizes that on account of Zambia’s restructured debt, both in the short and long term the country expects more inflows of foreign direct investments into the economy with reduced speculation. Ultimately the development can stabilize the exchange rate. “We are expecting in the medium-term reclassification of Zambia’s sovereign position, which should bring down the cost of borrowing. So overall, it’s confidence-inspiring and on the back of confidence inspiration, and the certainty associated with it, there should be better decision-making, lowering the cost of funding, making capital more affordable, making capital more available in the long term, and helping stimulate the economy for the benefit of all.”

ANTICIPATED

In terms of the anticipated benefits to local enterprises, the Kitwe Chamber of Commerce thinks social investment must begin to happen because sooner than later the Government will now begin to look at the construction of roads, schools, and irrigation projects among others considering the adverse effects of climate change.

“As captains of industry, we support the Government agenda so that we in turn as business people can grow our businesses. We hope that the business people will come on board with the alternative sources of energy or power investment. And for now, it’s a time to stay and put on positivity,” Chamber President Emmanuel Mbambiko says

The External Bondholder Steering Committee have affirmed that while the 2024 Agreement provides some further debt relief beyond that provided for in the November 2023 agreement-in-principle reached, the additional concessions will allow for the standing default on the Eurobonds to be cured, and will support the restoration of Zambia’s macroeconomic and debt sustainability in the context of the IMF-financed programme.

“Prompt implementation of a debt restructuring agreement with bondholders is not only in Zambia’s interests, but the wider creditor community as a whole,” read the final communique.  

And Lusaka-based investment analyst Munyumba Mutwale opines that despite immediate challenges, Zambia’s financial landscape shows promise, buoyed by the deal. 

“The agreement may lead to a positive re-rating of Zambian credit instruments, attracting more offshore investors to Zambian bonds. Investors are encouraged to adapt their strategies, capturing high-yield opportunities and considering longer-term bond investments.” 

Mutwale hints that with leading economies likely to reduce interest rates, there is a growing appetite for higher-yielding bonds, evidenced by record demand and issuance in the developed world. With the sovereign bond issuance surge at an almost record $11.6 trillion in sovereign bond issuance is expected in 2024, ramping up competition for bond demand.

However, drought leading to potential food inflation and electricity shortages could either slow down the economy or increase foreign exchange pressures due to the need for expensive electricity imports. “While there’s potential for foreign exchange rate improvements, challenges persist with record consumer goods imports, high electricity import costs, and low copper production,” Mutwale added.

Meanwhile, the Zambia Civil Society Organization (CSO) Debt Alliance has underscored the potential benefits of the deal, stating that it offers significant upfront debt relief and promises future relief proportional to the country’s economic advancement in the coming years without passing on economic burden onto the future population.

CSO Debt Alliance coordinator Peter Mumba has since cautioned the government against jeopardizing the recently negotiated debt restructuring agreement by failing to adhere to its repayment obligations adding that the new deal stipulates that any default in debt payments could lead to the collapse of the agreement. “It remains important for Zambia to enhance its domestic revenue mobilization efforts, prioritize prudent fiscal management, and operationalize the sinking fund to ensure long-term stability as the country prepares to resume its debt restructuring obligations this mid-year,” Mumba said.

Despite this warning, Mumba commended the government for its efforts in securing the debt restructuring agreement with the ad hoc creditor committee representing Eurobond Holders.

He noted that the reduction of Zambia’s debt from $3.98 billion to US$3.05 billion would not only attract more foreign investment but also provide immediate and future debt relief commensurate with the country’s economic progress

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