by Jevans Nyabiage in SCMP, Nov 27, 2023
When Zambia struck a debt deal with bilateral creditors to restructure US$6.3 billion in loans in June, Lusaka said it “a significant step” to restore debt sustainability.

The International Monetary Fund (IMF) went further, saying it was a “breakthrough” and precedent-setting.

The IMF said it would use the deal as a template for other nations such as Ethiopia and Ghana that are also seeking debt restructuring under the G20’s Common Framework.

Under the deal, China – as Zambia’s largest bilateral lender – has the biggest burden by agreeing to restructure US$4.1 billion of the total, with France, Britain, South Africa, Israel and India shouldering the rest.

As part of the agreement, Beijing and the other creditor countries – known as the Official Creditor Committee (OCC) – pushed for comparability of treatment (CoT) principle in which private bondholders would have to offer comparable debt relief.

Zambia proceeded to seek debt restructuring from private bondholders but the terms they reached in October were rejected by the OCC and the IMF.

The OCC also rejected a revised deal tweaked with the IMF in mid-November, saying it did not provide enough debt relief and did not meet the CoT criteria.

The setbacks have not only thrown into question the prospects for the Zambia deal, they might also discourage other debt-ridden African countries to follow similar paths, according to analysts.

The impasse is over just how big and what kind of a loss private bondholders should take.

Patrick Curran, a senior economist at research firm Tellimer, said official creditors were averse to nominal haircuts, preferring longer maturity extensions and lower interest payments instead. Bondholders, on the other hand, tended to prefer some level of upfront nominal haircuts in exchange for earlier payments in the form of higher coupons and shorter maturities.

China is responsible for restructuring the largest portion of the debt and without its approval no restructuring can go ahead.

Zambia and the IMF viewed the revised deal as sustainable and compatible with the CoT principle, but China and other official bilateral creditors want bondholders to take a larger haircut than what Zambia’s government or the IMF deemed necessary.

This did not go down well with private investors, who said the decision was “extraordinary” and would have “significant adverse consequences, most immediately for Zambia”.

Curran said the restructuring talks appeared to have hit a stalemate, with no further progress possible unless the OCC softened its position on the CoT principle.

According to the Economist Intelligence Unit (EIU), this dispute could put restructures in jeopardy, and Zambia’s protracted debt restructuring negotiations would likely discourage other heavily indebted African nations from seeking similar deals.

For Zambia, the stakes are high.

It has been in a crisis since 2020 when it defaulted on some of its foreign debt at the height of the coronavirus pandemic. Until the issue is resolved, Lusaka cannot attract much-needed foreign direct investment and there is no access to the international capital markets, according to Zambian officials. Further, the protracted debt negotiations have hit domestic bond markets, with the Zambian currency the Kwacha falling by 30 per cent against the US dollar this year.

Zambia’s troubles could also signal the difficult road ahead for Ethiopia, which recently also secured a debt restructuring deal in principle with its official bilateral creditors, and is seeking to start talks to restructure a US$1 billion Eurobond maturing next year.

Ethiopia, which is a key Chinese ally, had already secured a debt deal with China in August when Ethiopian Prime Minister Abiy Ahmed met Chinese President Xi Jinping on the sidelines of the Brics Summit in Johannesburg. Xi promised to suspend Ethiopia’s payments on debt maturing in 2023 and 2024 as part of the common framework for debt restructuring.

China is Ethiopia’s largest bilateral creditor, having advanced an estimated US$13.7 billion in debt to China between 2000 and 2021, according to Boston University data.

Curran said the rejection of the Zambian deal “is a dangerous precedent and could serve as a major hindrance not only in Zambia’s restructuring but also in future restructurings”.

“We will be keenly watching how the process unfolds in Zambia and assessing the implications for other current and impending restructuring cases both within the [G20] Common Framework, like Ghana and Ethiopia, and outside it, like Sri Lanka,” he said, referring to a multilateral mechanism for forgiving and restructuring sovereign debt.

Charlie Robertson, head of macro strategy at FIM Partners, an asset management firm, said foreign bondholders owned roughly US$3 billion of Zambia’s debt, “so have a bigger role than in Ethiopia but … interestingly, the gross domestic product impact from default is not very high, it is usually about 2 percentage points off growth”.

However, Robertson said longer restructuring may not necessarily hit foreign investor confidence in primary commodity exporters like Zambia and Ethiopia.

“It probably doesn’t make much difference in fact. A copper mine or a rose plantation might still get invested in even in a default situation,” Robertson said, referring to Zambia, which is one of the top copper producers in Africa, while Ethiopia has attracted investments in the horticulture industry.

Nevertheless, Robertson said he suspected “the protracted negotiations will deter other African countries from defaulting”.

“And given the bandwidth that these defaults require from institutions like the IMF … I imagine they will be keen to minimise the number of countries that do default, by being flexible, as they are with Kenya for example,” Robertson said.

On Ethiopia’s restructuring, Mark Bohlund, a senior credit research analyst at REDD Intelligence, said although there was not an up-to-date breakdown of the bilateral debt, most Ethiopia’s non-Paris Club debt of US$6.85 billion was owed to China. But India and Turkey were among the larger creditors.

Bohlund said he expected the “Ethiopia debt restructuring will be easier as we are likely talking about a maturity extension of principal payments rather than any writedown”.

He said with bondholders well aware that Ethiopia was in no position to make the US$1 billion principal payment next December, they would most likely accept an extension of the maturity even if it was at the current coupon rate, “which is pretty attractive if you have bought the bond at the current discounted rate”.

“It is clear that China will be looking closer at the comparability of treatment, as evidenced in Zambia. But should be less of an issue in Ethiopia,” Bohlund said.
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