Zambia: IMF Deal Key Step to Debt Restructuring – Fitch
Staff-level agreement between the International Monetary Fund, IMF, and Zambia’s government on an extended credit facility (ECF) marks an important step forward in the country’s debt-restructuring process, says Fitch Ratings.
However, IMF Executive Board approval of the ECF – and access to the USD1.4 billion in financing – is unlikely before significant progress towards an agreement with creditors, including bondholders, in the context of its application for treatment under the G20 Common Framework (CF).
Zambian authorities have said that they aim to form an official creditor committee in the first quarter of 2022. The committee will use an IMF/World Bank Debt Sustainability Assessment (DSA) to assess the need for debt treatment.
The key parameters of the treatment will be enshrined in a memorandum of understanding (MOU), which Fitch said could clear the way for Board approval of the ECF by the end of the first quarter in 2022.
The MOU will also provide the basis for negotiations with private creditors, as a CF deal with bilateral creditors would require comparable treatment by commercial external creditors.
Eurobond investors hold approximately 40% of Zambia’s external debt, unlike other countries attempting a CF restructuring. Fitch said if the investors are unwilling to accept the MOU’s terms that could delay the process.
“Bond investors’ reluctance to agree to the government’s consent solicitation to pause interest payments was a precursor to Zambia’s November 2020 default event”, it said.
The IMF has however indicated that the ECF will support a large upfront fiscal adjustment as well as efforts to shift spending from subsidies and inefficient public investment towards health, education, and the delivery of social benefits.
“We believe adjustments to Zambia’s food and energy subsidies will be an important element of any significant fiscal reform framework. However, such changes could be politically controversial, both because Zambia’s farm subsidies have been a vector for corruption and because reform could lead to higher food and fuel prices”.
Previous bouts of inflation have been a spark for political unrest, it added. Fitch views the shift in the government’s focus to debt sustainability and macroeconomic stability under the new administration as credit positive.
However, Fitch analysts would only look to move Zambia’s Long-Term Foreign-Currency Issuer Default Rating out of ‘RD’ once a debt exchange is agreed and relations are normalised with international creditors.
Zambia’s default was the result of long-term fiscal trends and several years of external debt accumulation. Weaknesses in public financial management are likely to remain despite signs of willingness to undertake fiscal reform.
The Covid-19 shock of 2020 saw Zambia’s fiscal deficit reach 12% of GDP, which took general government debt to 118% of GDP. By comparison, the median debt/GDP ratio for ‘B’ rated sovereigns was around 65% of GDP in 2020.
“We expect the country to record a deficit of 10.3% of GDP in 2021, above the budgeted target of 9.4%, easing to 8.5% in 2022, still well above the budget target of 6.7%”, Fitch said.
It noted that high copper prices will provide support for Zambia’s external debt sustainability, as increased copper export receipts will lower the country’s gross financing requirement and bolster international reserves.
However, they may complicate debt restructuring negotiations if creditors view them as supporting the government’s debt repayment capacity, even though copper receipts have historically averaged only around 10%-15% of fiscal revenue.
The global rating firm believes the speed of Zambia’s debt-restructuring negotiations under the CF, any benefits in terms of net-present value reductions, and the subsequent prospects for renewed market access will be closely observed by other stressed sovereigns and could affect their willingness to participate in potential debt restructurings under the framework.
#Zambia: IMF Deal Key Step to Debt Restructuring – Fitch
