By Paul Wallace (Bloombueg)
- Zambia’s Eurobonds have lost more than 10 percent this month
- Yields could rise further without an IMF deal, says Neuberger
The emerging-market selloff is piling pressure on Zambia to stabilize its finances and strike a bailout deal with the International Monetary Fund.
Zambia’s Eurobonds were struggling even before sentiment toward developing nations turned bearish around mid-April as the dollar strengthened and U.S.-China trade tensions worsened. Those factors, along with contagion from Turkey’s financial crisis, have made the pain even more acute.
Zambia’s Eurobonds have lost 10 percent this month, more than any of the 75 countries in the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index. That’s extended their decline to 23 percent this year and sent spreads over U.S. Treasuries soaring to more than 1,000 basis points.
The southern African nation’s creditworthiness has been downgraded twice in the past month. S&P Global Ratings cut the foreign-currency rating to B-, six steps into junk territory, last week, saying that the budget deficit and pace of debt-accumulation would be higher than it previously forecast. Moody’s Investors Service lowered its assessment to Caa1 shortly before that.
Yields on Zambia’s $1 billion of notes maturing in 2024 fell 1 basis point to 13.86 percent on Monday, though they’re still up about 740 basis points in 2018.
“Zambia’s yields could rise further because its fundamentals are still very fragile,” said Kaan Nazli, a strategist in The Hague with Neuberger Berman, a $300 billion money manager that owns Zambian Eurobonds. “It’s not a place that investors would rush into even if emerging markets become popular again. People will be cautious about Zambia until it produces better numbers or gets an IMF deal.”
The country’s revenue streams are strong enough to avert a default at least until 2022, when $750 million of Eurobonds mature, said Nazli. A spokesman for the Ministry of Finance in Lusaka, the capital, didn’t immediately reply to an emailed request for comment.
Zambia was one of Africa’s most prolific borrowers in the Eurobond market between 2012 and 2015, selling $3 billion of debt. It also took on loans from Chinese state firms, some of which it’s trying to renegotiate. The government’s debt load will rise to 66 percent of gross domestic product this year, more than triple the figure a decade ago, according to the IMF. The Washington-based lender says Zambia’s 2018 budget shortfall will be almost 8 percent of GDP, the highest among sub-Saharan African dollar-bond issuers.
The debt problems have been exacerbated by trade wars. Copper, Zambia’s biggest export, has been among the commodities hardest hit by U.S. leader Donald Trump’s fight with Beijing. Prices have slumped 17 percent since peaking in June.
It’s also one of the more vulnerable countries if outflows from African bond markets pick up as the dollar rises, thanks to relatively high foreign holdings of Zambian kwacha debt, according to Mark Bohlund, an analyst at Bloomberg Economics in London.
Talks with the IMF have dragged on for months. The Ministry of Finance said in a statement Friday that the two sides had a “healthy and intact” relationship and that it was carrying out “actions required to facilitate the recommencement of discussions for an IMF-supported program.”
Zambia’s Eurobonds are the worst-performing in EM in August
Source: Bloomberg Barclays Emerging Markets USD Sovereign Bond Index
“Without further steps to curb spending and limit non-concessional borrowing, the likelihood of IMF support in the near term appears low,” Maria Paola Figueroa, an economist at the Institute of International Finance in Washington, said in a research note on Aug. 23. “Amid dwindling foreign reserves, and in the absence of an IMF program, the economy remains highly vulnerable.”
Still, Zambia’s assets may rally if it manages to get a loan. Angola’s Eurobond prices jumped last week after it said it was asking the IMF for financial support.
“There doesn’t seem to be much urgency at the moment from Zambian officials to get an IMF program in place,” said Brett Rowley, a Los Angeles-based managing director at TCW Group Inc., which manages almost $200 billion of assets, including Zambian securities. “But most people agree that’s the endgame. The emerging-market selloff has left them even more exposed. Until an IMF program is in place, Zambia will be seen as one of the more vulnerable emerging markets.”
— With assistance by Taonga Clifford Mitimingi, and Matthew Hill