Stand-off with Chinese and private creditors threatens to deepen Zambian debt crisis

Zambia’s debt troubles could worsen as a stand-off with Chinese and commercial private creditors threatens to push the southern African nation into default. China is demanding “equal treatment of all creditors” after it raised concerns that the debt relief it is extending to Zambia may be used to service debt owed to bondholders. But its private creditors, who hold US$3 billion in Eurobonds, have similar concerns and are worried that any debt relief they grant Zambia will be used to service debts owed to Chinese lenders. On October 13, Zambia stopped servicing its debts to private creditors citing the impact of the Covid-19 pandemic on the country’s finances. And last week, Africa’s second-largest copper producer failed to honour a coupon payment of US$42.5 million on its US$1 billion April 2024 Eurobond. The payment was due on October 14 with a 30-day grace period. Ratings agency Standard & Poor’s has since declared Zambia’s government in default. Chinese bank signs debt suspension deals with 11 African countries A meeting scheduled for Tuesday to consider a six-month interest payment holiday on the country’s US$3 billion Eurobond was postponed until November 13 – when the grace period ends – after a group of investors declined to attend. However, most the creditors have already said they will reject Zambia’s plan to suspend debt servicing until April next year. Bondholder have also criticised the government for its failure to explain whether other lenders such as China had provided a moratorium on debt payments. On the day the meeting with Eurobond creditors was called off, Wu Peng, the head of African affairs at China’s foreign ministry, welcomed Zambia’s resolve to treat creditors equally. “China will support related efforts with all parties, including private creditors,” Wu tweeted. On Wednesday, foreign ministry spokesperson Zhao Lijian said China would support the Zambian government in handling debt issues in accordance with the principle of “equal treatment of all creditors”. “We will work with relevant parties, including private creditors to alleviate the debt pressure of Zambia,” he said. Sri Lanka secures US$90 million grant from China amid ‘debt trap’ call Mark Bohlund, senior credit research analyst at REDD Intelligence, said the main issue was the question of what to do with the arrears Zambia ran up earlier this year to Chinese creditors while continuing to service its Eurobonds and other commercial debt. About US$200 million that was due to Chinese creditors this year has not been paid, and the lenders have demanded Zambia service the loans before they agree to any debt reprofiling. Zambia wants the amount to be part of the debt relief plan, but Chinese lenders have rejected that proposal, according to local media reports. “The Chinese are arguing that these arrears need to be paid to achieve equal treatment before negotiations on how to restructure the debt due following the formal request for the standstill,” Bohlund said. The Chinese were also concerned that the Debt Service Suspension Initiative (DSSI) they extended to Zambia would be used to service the Eurobond payments, a key reason why Zambia would not pay the October coupon on its 2024 Eurobond, he said. Private creditors were pushing for greater transparency and information sharing in accordance with Paris Club principles, he said. “I think China will be forthcoming in writing down their debt but won’t accept terms worse than [those for] other parties. “Much of the crux in the negotiations will be about the classification of debt from China Development Bank and other state-owned banks that have lent at concessional terms but are seen to have been part of Beijing’s Belt and Road Initiative and other foreign policy aims,” Bohlund said referring to China’s development plan for infrastructure investment and trade. Bwalya Ng’andu, Zambia’s finance minister, told lawmakers last week: “We seem to be discriminatory in the treatment of our creditors as we were servicing certain categories of our debt while not servicing others.” A particular concern was that Zambia had continued to service all Eurobond payments when they fell due, while allowing the accumulation of arrears on other portfolios, he said. “The exclusion of Eurobond payments from the DSSI request also made some creditors reluctant to grant DSSI as they were concerned that the debt relief they would provide would be used to pay debt service to other creditors and not be channelled towards Covid-19 related expenditures as intended,” Ng’andu said. World Bank chief calls on China to cancel debt to coronavirus-hit poor countries Charles Robertson, global chief economist at the Renaissance Capital, an emerging and frontier markets investment bank, said he expected China would accept a moratorium on interest payments from Zambia, in line with G20 norms under the DSSI initiative. “As in Ethiopia and Angola, this is unlikely to require private sector participation,” he said. “Negotiations between the private sector and Zambia are likely to be difficult, as copper prices are around a five-year high and Zambia’s historic reluctance to do an IMF deal casts real doubt on their willingness to treat creditors fairly.” Copper prices slumped in the wake of the Covid-19 pandemic before rebounding, pushing Zambia’s external public debts close to US$12 billion. The recent rise in prices has made creditors more reluctant to offer relief. Chinese lenders, including policy banks China Exim Bank and China Development Bank, hold about US$3 billion of that debt, according to S&P Global Ratings. Jermaine Leonard, director and primary analyst for Zambia at Fitch Ratings, said of Zambia’s negotiations with foreign lenders, “bondholders want to see a more credible fiscal consolidation strategy from the government”. Chinese lenders were actively involved in debt reprofiling conversations with African creditors, he said. “China Exim Bank has been involved in several debt suspension deals with African creditors as part of the DSSI. Other Chinese lenders are in various stages of debt reprofiling, but on a bilateral basis.”