Zambia edges towards debt default, but bondholders could make millions

3 November 2020 by Tim Jones

Street sellers in front of a mural in Lusaka, capital of Zambia. In 2019 Zambia’s public spending is due to be 18% lower than in 2015 with further cuts anticipated by the IMF for several years to come. (Photo David Brown / Flickr).

Zambia will go into debt default on the 14th November if a resolution is not reached with their private creditors following a missed interest payment in October. The southern African country has requested a six-month extension on interest payments to help cope with the economic impact of the Covid-19 pandemic, though in reality large scale debt cancellation is needed.

Zambia spends four times more on external debt payments than public healthcare

Real public spending per person has fallen by 18% in recent years, as the debt crisis has hit government finances

If paid in full some bondholders could make 250% profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders.

Jubilee Debt Campaign warned back in 2015 that Zambia was at risk of a government external debt crisis, with an increasing debt payment burden and overreliance on copper exports for income from the rest of the world. This crisis has arrived in recent years, with the Zambian government’s external debt payments increasing from 4% of government revenue in 2014 to a predicted 33% in 2020, even before the impact of the Covid crisis .

The consequence of this rising debt payment burden has been felt in government spending on other areas. Even before the Covid crisis, Zambia’s real public spending per person fell by 18% between 2015 and 2019. The $1.7 billion Zambia is due to spend on external debt payments in 2020 is four times more than the $400 million the government spends on public healthcare. Over 16 million Zambians – 88% of the population – live on less than £4.20 a day.

According to the World Bank, of Zambia’s government external debt, 49% is owed to private lenders, 27% to China, 10% to the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, 9% to other multilateral institutions and 5% to other governments.

$2 billion was lent to Zambia through foreign currency bonds in 2012, 2014 and 2015, and a further $2.8 billion through other forms of private loans between 2012 and 2019. According to the World Bank, $3 billion was lent by China between 2012 and 2019. Of the $1.7 billion due to be spent on external debt payments in 2020, $1.1 billion – 65% – is to private lenders.

The World Bank also now reports data on the residency of private lenders (other than for bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. -holders). According to this data, of the $2.4 billion Zambia owed at end-2019 in private (non-bond) debt, 56% is owed to UK banks, 20% to banks based in China or Hong Kong, 14% to banks based in Israel and the remainder to banks in Italy, the US, Denmark and South Africa.

Bonds are traded publicly, which means we can observe the price traders are paying for Zambian debt. Since 2013 Zambia’s bond that it is due to repay in 2022 has been bought and sold for less than its face value, because speculators have thought there is a chance Zambia might default. Since August 2018 traders have paid 70 cents on the dollar or less – with a low of 30 cents on the dollar reached in March 2020. It is currently trading Market activities
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
at 45 cents on the dollar.

A trader who bought Zambia’s 2022 bonds in August 2018 will make around 75% profit if they receive all interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. and principal payments in full. A trader who bought the same bond in March 2020 will make 200% profit. A trader buying Zambia’s 2027 bond now could make 250% profit if every interest and principal payment is made.

The original private lenders to Zambia lent at high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
of 5.375% to 8.97% because it was high risk lending. Many of the current owners of these debts bought them at low prices because it was expected that Zambia would not be able to repay the debts in full. The logic of private lenders behaviour is that significant amounts of the debt would need to be cancelled. That is exactly what should happen.

Profit bondholders could make from Zambia’s 2022 bond if paid principal and interest on time and in full

Date bond bought Price paid to buy $100 of Zambian debt due to be paid in 2022 Profit bondholders will receive if bought at this price and paid in full
August 2018 $70 75%
March 2020 $30 200%
October 2020 $45 150%

Zambia’s bonds

Bond Interest rate Price $100 of bond currently being bought and sold for Profit bondholders will receive if bought at current price and paid in full
Due September 2022 5.375% $45 75%
Due April 2024 8.5% $45 190%
Due July 2027 8.97% $43 250%

Tim Jones

Jubilee Debt Campaign



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