OPTIONS TO ADDRESS ZAMBIA’s DEBT CRISIS- ALTERNATIVES or ADJUNCTS to IMF
EXTRACT from Options for paying back Zambia’s Eurobond Debt- ZIPAR Working Paper No 39, December 2019
Mbewe Kalikeka, Shebo Nalishebo, Florence Banda-Muleya
a) ROLLING OVER:
If it can find new buyers for a new Eurobond, the Government would aim to issue another Eurobond in September 2022 upon maturity, with a total value of US$750 million and use the money raised to pay the holders of the current Eurobond. However, given the low credit rating and the current debt sustainability levels, it would be a challenge to find buyers of a new Eurobond at maturity. This is not an option that the Government should be considering. At worst, it is unfeasible; at best it is extremely expensive.
b) REFINANCING:
Under this option, the Government would seek to change the terms of the 2022 Eurobond before maturity, including extending its duration so that it does not have to be redeemed in September 2022. This could be challenging as it would mean negotiating with a wider range of players, and could be a long process – perhaps too long given the precarious nature of the Zambian Government’s position. As a first step, Zambia needs to establish who holds the country’s bonds and understand their priorities before entering any negotiations.
c) RDEDEEMING:
Under this option, the Government would pay the Eurobond when it became due in September 2022. This requires the Government to have US$750 million available at the time. The main issue is where these funds would come from. Basically, there are three options: higher taxes or increasing other revenues (or cuts to other spending), further borrowing or selling assets. The sale of some assets seems to be the most viable of the three options, but it is not a costless option. The Government would permanently lose control of these assets and any future dividend payments on them. The Government may also have to sell the assets at below their market value to ensure a successful sale in a short period of time, particularly if the assets are a large stake.
d) BOND BUYBACK:
If the Government chooses to redeem the Eurobond in September 2022, it would have to find US$750 million to do so. A bond buyback would allow the Government to pay for the principal at the current market value of the Eurobond which is only around US$500 million. To avoid default or refinancing the Eurobond, it would appear to make sense, therefore, for the Government to start buying back the Eurobond before redemption because of its lost value. But with no sufficient sources of financing for this option, the Government would need to raise funds for a buyback. Options for this are limited, but include trying to issue a new bond (though this will encounter the same challenges as a roll over) or the sale of assets.