Zambia’s Ministry of Finance, and its advisers (White & Case and Lazard), held an investor presentation earlier today via webcast following last Tuesday’s consent solicitation (see here). The presentation recording has been posted to White & Case website (here) and the slides have been posted on the consent solicitation website (here), where a follow-up Q&A document to questions posed during the presentation will also be posted (as well as on the Ministry of Finance website — here).
The key highlights for us were:
Updated economic data and forecasts (many of which were previously announced in last week’s budget):
GDP is expected to contract by 4.2% yoy in 2020 while inflation will reach 14.3%;
Government revenue will fall from 23% to 18.4% of GDP while spending will rise from 22.1% to 23.9% of GDP, creating cUS$1.2bn of additional financing needs;
Primary deficit expected to reach to 5.5% of GDP in 2020 vs 0.8% of GDP surplus prior to Covid;
Exports will fall by cUS$1.8bn and the current account will worsen by cUS$1bn, while currency depreciation will push up external debt service;
Unencumbered reserves dropped from US$1,218 at the end of 2019 to US$1,105mn by June;
Total public debt reached 104% of GDP at the end of 2019, with central government debt service reaching 87% of revenue and external PPG debt service reaching 27% of goods & services exports.
The 4 key principles of the creditor engagement strategy are:
Good faith efforts for a collaborative process to restore debt sustainability;
Fair treatment across creditors; and
Consistency with IMF debt sustainability analysis.
The 5 key objectives of the debt service standstill are:
Immediate liquidity relief to free up fiscal space;
Provide Zambia the necessary time and leeway to finalise its debt assessment, calibrate parameters of the debt exercise, and engage in good faith dialogue with creditors;
Reach an agreement in principle with creditors on debt strategy parameters compatible with Zambia’s public debt sustainability as per IMF definitions;
Formally implement agreements with creditors; and
Secure external financing in context of appropriate IMF engagement.
Debt relief is expected to total US$81m under DSSI plus US$897mn of voluntary debt service relief on commercial claims for a total of US$979mn. The small proportion of DSSI debt service relative to commercial claims helps explain the need for PSI, while the commercial debt service bill looks quite high given eurobond payments of only US$119 during the suspension period (implying large, and possibly previously unknown, private debt servicing obligations). The government has also asked that accumulated arrears be included in the debt service suspension perimeter.
Focus in 2021 is on fiscal consolidation, with the government planning to curtail all primary spending categories but social spending, limit spending on the wage bill to below 0.8% of GDP, and reduce the project pipeline. However, as we highlighted here, the fiscal consolidation measures outlined do not seem nearly ambitious enough to satisfy creditors or the IMF.
The government has already cancelled US$1.1bn of planned projects and will save US$280mn from rescoping existing projects. While a few strategically important projects already underway will continue (namely the 750MW Kafue Gorge Power Project — this could be a sticking point with creditors), there is a moratorium on contraction of new non-concessional external debt and new external debt will only be contracted in 2021 if highly concessional.
The IMF does not lend to countries whose debt is unsustainable, with Zambia’s debt currently in breach of all 5 debt sustainability thresholds. Therefore, prior actions for an IMF programme include 1) implementation of up-front actions (presumably fiscal consolidation); and 2) design and implementation of a debt strategy.
Total public debt reached 104% of GDP at the end of 2019, and is expected to reach 109% of GDP in PV terms by the end of 2020 (c115% in nominal terms assuming a 5% discount rate). Meanwhile, the PV of external public debt is expected to reach 85% of GDP in 2020, well above the indicative 30% threshold. With Zambia stressing that any restructuring will have to be consistent with debt sustainability per IMF definitions, this could imply haircuts of up to 65% on external debt.
Zambia hopes to reach an agreement with creditors and the IMF (at the staff level, at least) by the end of standstill period (14 April 2021). While this approach mirrors Ecuador’s recent consent solicitation and restructuring process (see here), Ecuador had an existing EFF (and so was already in close consultations with the IMF) and a much lower debt stock (c50% of GDP). We think Zambia’s lack of policy credibility will make this an ambitious timeline (see here). Indeed, the IMF acknowledged in its 24 September press briefing (here) that "given Zambia's complex creditor base, the debt restructuring is expected to take some time."
The next key date is 16 October for expiration of the consent solicitation and voting deadline and meetings with investors on 20 October. While the government does not plan to pay the 14 October coupon on its 2024s, it could still pay by the end of the grace period on 13 November if bondholder consent is not granted.
Overall, the presentation did not include much new information and we await the Q&A document for clarity (hopefully) on some of the thornier issues.
The presentation does, however, clearly confirm our earlier view that the debt service standstill through consent solicitation is not expected to be the end of the process and a more comprehensive restructuring will follow.
In addition, it will be important to see how bondholders react. They could very well choose to reject the consent solicitation, which would be a sign of a difficult road ahead.