ECONOMIST Noel Nkhoma says government’s second default on the Eurobond interest debt repayment will worsen the country’s credit risk profile, which means accessing foreign capital will be much harder.
According to the Ministry of Finance, government defaulted on a US $56.1 million coupon payment that fell due, Saturday, January 30, 2021, on the Eurobond set to mature in 2027.
This is the second time the country is defaulting after it missed another US $42.5 million Eurobond coupon payment in November, 2020.
Commenting on the unprecedented development, Nkhoma cautioned that the second successive debt default will make it difficult for Zambia to raise capital on the international market in view of the Zambian government’s inability to pay its creditors in a timely manner.
“…It’s a situation, first of all, that will worsen what we call our credit risk profiles, meaning that we are now making things worse for ourselves for the simple reason that even the international sovereign credit rating agencies like Fitch, I think, I have not yet seen their recent rating for Zambia, but it will make our credit rating worse and become extremely difficult for us to be able to raise capital on the international market. If at all we are going to raise capital, it will be at a premium, high interest, why? It’s because our credit rating continues to go up with the more we default on what we call maturing debt, the more our credit rating continues to erode,” Nkhoma said in an interview.
He, however, argued that government’s second debt default could be a strategy to enable thorough restructuring of sovereign debt.
“This government has asked for this moratorium for six months, which expires in April, I have a feeling that government is working on plan B because they have used this six months to restructure, reorganise and get the benefit of Lazard (Freres) to be able to come up with tangible debt repayment at the expiry of the six months. I think what the (Finance) Minister (Dr Bwalya Ng’andu) is saying is that, ‘since we have asked for this moratorium, we cannot honour any debt, which falls due within this time.’ So, it’s another strategy by the government, I think, to reorganise themselves and come up with let’s say tangible debt repayments. Because I think if the Minister asked for this moratorium and said, ‘after six months, we are coming back to you,’ I think even this same skipping of this payment falls within that same six months band,” Nkhoma said.
“..And I think that is the more reason why you have not seen the other lenders calling their debt by way of what we call a ‘cross-default’ because I think government has asked for a ceasefire for six months to restructure, reorganise and be able to come up with a tangible and bankable debt repayment plan. So, I think what the lenders are doing now, they are giving government a benefit of doubt to say, ‘well, they asked for six months, let’s wait’.”
He also said that government’s decision to default had been done in a bid to treat all creditors the same.
“Government has hired Lazard as what we call advisors on debt restructuring. Now, I would like to believe that in all the decisions, that also speaks to the recent default or non-honouring of the debt payments is informed by the advice that they are getting from Lazard. Now, to me, the position that the Minister of Finance has given is basically saying that, ‘we want to treat all creditors pari passu, meaning that regardless of the more or less, how your debt has been profiled and regardless of how much we owe you, all of you will be treated equally, meaning that if we are going to pay one, we pay all,” said Nkhoma.
“So, I would like to believe that maybe government has plan B, which maybe they are working on. But I think from the Minister’s statement, I get a feeling or I form an opinion that it all speaks to the fact that we, in the state of our current economy and reserves, we may not have capacity to honour those debts. Mind you, we also have to be alive to the fact that I think there is what you call like cross-default in our debt, in our Eurobond contract, which basically means that if you default on one creditor, the other lenders can as well call their loans so I think it’s a situation of the other lenders being patient with us hoping that government has got plan B to be able to honour their obligations, that’s what it means.”