Turkey’s financing of Zambia’s Eurobond will be costly – CTPD

Government’s move to engage a Turkish company to refinance Zambia’s US $750 million Eurobond may translate into increased costs due to the suspended IMF bailout programme, says the Centre for Trade Policy and Development (CTPD).

And newly-elected Economics Association of Zambia (EAZ) president Dr Lubinda Haabazoka has appealed to government to ensure that terms in the loan agreement are favourable for the country.

Commenting on government’s move to engage an interested unnamed Turkish company to refinance Zambia’s US $750 million Eurobond, CTPD executive director Isaac Mwaipopo cautioned that the government’s attempt to embark on this move could translate into increased costs given no deal has yet been reached to secure the illusive International Monetary Fund (IMF) bailout economic package.

Last Saturday, President Edgar Lungu, in the company of his Turkish counterpart, Recep Tayyip Erdoğan, announced at State House that a Turkish firm expressed interest in refinancing Zambia’s US $750 million Eurobond maturing in 2022.

“With regards to the move by the Zambian government to seek help in refinancing the US $750 million Eurobond scheduled to mature in 2022, CTPD is of the view that refinancing the loan at this time may translate into increased costs due to the suspended IMF bailout programme package,” Mwaipopo stated in a press release issued, Monday.

He explained that bond refinancing worked better when a sovereign country’s credit rating was positive, contrary to Zambia’s position, whose economic outlook was forecast as negative by Fitch last Friday.

“Bond refinancing works better when a country’s credit rating and macroeconomic conditions improve because this could translate into lower yield rates on bonds. If the yield rates fall below the coupon rate of the bond, refinancing using the same terms as the original bond would translate into savings,” Mwaipopo argued.

“Furthermore, the terms of the new bond can be altered to allow for better repayment terms. For Zambia, following the increased illusiveness of the IMF bailout package, and the adjusted debt-sustainability assessment from medium to high risk of debt distress, Zambia’s dollar securities became the worst-performing in the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index, which includes more than 70 countries.”

He stressed that government should work on improving Zambia’s credit worthiness and also focus on operationalizing the Sinking Fund.

“CTPD is of the view that the Zambian government should first work on improving its credit worthiness by reengaging with the IMF and pursuing visible fiscal consolidation. Bond refinancing can then be done at reduced cost to the Zambian people. We are in agreement with the recent recommendations advanced by the IMF’s Resident Representative when he said government should not to tap into the international market at this time as the financing conditions are ‘pretty tight right now,’ and would be very expensive,” he narrated.

“Government should concentrate on realizing fiscal consolidation and the operationalization of a Sinking Fund. The Ministry of Finance informed the general public in 2017 that the government would operationalize a Sinking Fund that was to help government set aside funds for the repayments of Eurobonds when they fall due after 2021. This strategy had the potential to reduce the risk of default and ease pressure on debt servicing when the Eurobonds mature.”

Mwaipopo further called on government to tread with caution over their refinancing of the bonds, especially bearing in mind the cost implication for Zambian taxpayers.

“CTPD urges government to tread cautiously as it explores refinancing options, there will be need to count the cost and clearly establish payment plan from the very onset, otherwise it may turn out to another huge cost to the Zambian economy and the Zambian people,” stated Mwaipopo.

“If Zambia is to acquire a bilateral financing bailout from Turkey, at what cost will this be? What is in it for Turkey? We call upon the government to publish full details of the reported 12 trade and economic deals signed with Turkey, this will help the public to know and appreciate what we may be getting into as a country.”

And Dr Haabazoka also expressed concern over the cost of refinancing the country’s Eurobond.

“There is need for government to explain the refinancing of the US $750 million Eurobond using debt from a named Turkish firm to citizens and the markets to avoid sending negative sentiments,” Dr Haabazoka advised in response to a press query, Monday.

“Our appeal to those that will negotiate the debt is that they should ensure that terms in the loan agreement are favourable. It might also be advantageous to ensure that the Turkish government is convinced to own equity in the debt we shall get to make possible future debt restructuring cheaper and easier.”

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