The IMF staff projected the Zambian external financing needs at USD 11.0 bn between 2022-25.

The debt restructuring agreement could lower financing needs by USD 8.4 bn, with the remaining gap to be covered by IMF funding and other multilateral assistance.

However, we believe that the IMF’s estimates of the external financing needs rely on optimistic assumptions of exports and foreign direct investment inflows linked to the copper industry.

While external headwinds and the underperformance of the copper industry put in jeopardy the program's success, we remain cautiously optimistic regarding Zambia’s chance...

Authorities presented the 2023 budget proposal to the parliament, with a projected overall deficit of -7.7% of GDP.

The fiscal gap is -0.6 p.p. wider than the level agreed with the IMF. Nonetheless, the budget is broadly consistent with the recently agreed reform package.

The difference is mostly related to a reform in the royalty regime for the copper industry, which aims to increase investment in the sector.

The real GDP expansion of 4.0% for 2023 included in the budget proposal strikes us as optimistic, as it is 1.3 p.p. higher than our forecast.

Although bonds are now trading at the high end of our Fair Values e...

The IMF executive board approved a new extended credit facility arrangement equivalent to USD 1.3 bn.

The 38-month program includes a sustained fiscal adjustment and a series of parameters to consider during the ongoing debt restructuring process.

According to the evaluation, the country needs USD 8.4 bn in debt relief between 2022 and 2025.

Despite the financing assurance provided by the official creditors' committee, authorities must seal the deal before the first review of the program.

Given that our fair value estimates are slightly below current prices and that we see considerable downside risk, we move our...

The first half of the year has been marked by debt restructuring negotiations with external lenders, and everything points to a second half driven by the same topic.

The government seems close to an agreement with official creditors to unlock the IMF bailout and start negotiations with commercial lenders.

The fiscal consolidation plan seems to be on track, and we expect a primary surplus of 1.7% of GDP in 2022.

The bullish copper market from H1-2022 has improved the external revenues, and we forecast a current account surplus of 13.4% of GDP in 2022.

After shedding 26.7 pts YTD to trade at an average of 50.6 cents, ...

The government has relied on the domestic market to fund a larger share of the fiscal gap after it defaulted on its external debt.

While the domestic banking system has become one of the government’s main creditors, its funding capabilities are limited by its relatively small size. 

Holdings of government securities of the banking system soared to USD 2.7 bn at the end of Q1-2022, a 7.5% YTD expansion, causing a crowding-out effect on the credit supply to the private sector.

Financial soundness indicators at the end of 2021 show robust numbers in every category.

We maintain our SELL recommendation given a...

Zambia recorded its fourth consecutive quarter of GDP growth with a 2.2% YoY expansion in Q4-2021, to round up the year with a 3.6% GDP increase.

The overall result was driven by construction and information and communication activities, which generated 2.3 percentage points of the 3.6% growth.

We expect the country to keep its growth momentum, with a 3.5% forecast for 2022.

Our growth projection would align Zambia with the expected regional and global expansion.

SELL: We still believe that bonds are pricing a very optimistic outcome for the negotiations.

The Zambian government keeps pushing back the deadline for the debt restructuring, dampening previous market overoptimism.

The IMF’s debt sustainability analysis is already finished but has not yet been made public.

China seems to be delaying the negotiations, in our view only to obtain better terms than the proposed ones.

We still believe that bonds are pricing a very optimistic outcome for the negotiations, and therefore maintain our SELL recommendation.

The boost provided by the bullish copper market in 2021 helped Zambia to close the year with positive results on its external accounts.

The country recorded a current account surplus of 11.0% of GDP that allowed it to rebuild its gross international reserves, which increased to USD 2,796 mn (132% YoY growth).

The conflict between Russia and Ukraine has shocked commodity markets, with mixed effects over the Zambian outlook for 2022.

We forecast a positive current account balance of 11.0% of GDP for 2022.

While prices have trended towards our fair value estimates, we maintain our SELL recommendation because of asymmet...

Authorities are focused on securing the IMF bailout and on advancing negotiations to restructure the external debt.

2022 also marks the kick-off of a domestic reform program that is focused on improving the government’s fiscal health and debt sustainability.

The government published a medium-term budget plan to gradually reach fiscal consolidation over the next three years.

Authorities aspire to modestly cut the overall fiscal gap from -7.3% of GDP in 2021 to -5.2% of GDP in 2024.

SELL: Despite the recent downward adjustment taking bonds closer to our fair value estimates, we continue to see very limited upsid...

Zambia’s 2022 outlook hinges on the authorities’ abilities to secure the IMF’s assistance and an external debt restructuring agreement.

The government has requested the formation of an official creditor committee by February to negotiate the parameters of the debt restructuring process.

The success in negotiations with official creditors will set the tone of the negotiations with the rest of the external creditors, and will likely unlock the IMF deal.

President Hichilema also has set in motion reforms to improve the country’s fiscal position, and we forecast a primary surplus of 0.8% of GDP, the fi...

Zambia reached a staff-level agreement with the IMF on an Extended Credit Facility.

The arrangement goes from 2022 to 2025 and is worth about USD 1,400 mn.

Zambian authorities will have to reach a deal with external creditors before the ECF agreement can be presented to the IMF Executive Board for final approval.

The assistance aims to promote a bold set of economic reforms related mainly to fiscal management and debt sustainability. 

SELL: Given current valuations, just before the debt negotiations, there are limited upsides when downsides may be significant if they are more aggressive than expected.

The copper price rally has boosted government revenues, but we still expect the 2021 fiscal deficit to close at -7.4% of GDP, 1.9 p.p. higher than the official target.

The proposed budget for 2022 aims to cut the overall deficit to -6.7% of GDP, and to record the first primary surplus in more than a decade.

On the revenue side, the government expects to collect more than 20% of GDP, despite modifying the mining taxation to allow the producers to deduct royalties from income taxes.

On the expenditure side, authorities aim to cut capital expenditures and good and service consumption while restarting the external debt servic...

External debt was at USD 14.7 bn (70% of GDP) by end-September, according to the Ministry of Finance, Musokotwane, in the budget presentation at the congress.

By end-June 2021, Eurobonds represent about 19% of the country total external debt, while the debt with China was almost the 35% of this.

Musokotwane would like to have an IMF agreement by end-November 2021, which may include a USD 1.3 bn loan.

The markets seems to be pricing a very friendly restructuring of the Zambian Eurobonds.

The Gross Domestic Product contraction of 2020 was -2.8%, -0.5 p.p. worse than our forecast.

2021 started with and underwhelming 0.5% YoY expansion in Q1-2021, to record a massive improvement of 8.1% growth in Q2-2021.

The main contributors to the 8.1% expansion were construction (2.1%), wholesale and trade (1.6%), and information and communication (1.4%).  

The results from the first half, and the tailwinds from the bullish commodities market made us forecast a 3.4% GDP growth for 2021.

HOLD: High bond cash prices reflect an optimistic view of the forthcoming restructuring operation, which is more consistent w...

Elected President Hakainde Hichilema was inaugurated on August 24, appointing Situmbeko Musokotwane as finance minister.

The President has stated that they inherited an empty treasury with a much bigger fiscal gap than expected.

The total public debt stock stood at USD 20.9 bn (102.6% of GDP) in H1-2021.

Domestic arrears are on the rise, with the government owing USD 1.4 bn in arrears related to capital and road projects, and USD 1.5 bn in VAT refunds.

HOLD: Bonds prices are trading on the implicit expectation that the recovery value will be between 75-80%. 

Opposition candidate Hakainde Hichilema won the presidential election by a landslide.

Despite initial claims of irregularities, President Lungu later conceded the defeat and committed to complying with a peaceful transition of power.

The United Party for National Development (UPND) also won control of the parliament with 82 out of 157 seats.

The unexpected result boosted the local currency, which has appreciated of 13.2% since the elections.

HOLD: The bonds are trading at two-year highs, as Hichilema announces that he will prioritize a transparent agreement with the country's creditors.

In recent years, green, social and sustainability (GSS) bonds have had a surge that the pandemic deepened.

Issuences in GSS bonds reached 330.5 bn last year, compared to 71.9 bn in 2019.

As expected, sovereign issuers are beginning to consider this alternative to seek moderately cheaper financing.

But their benefit should not be overstated and investors must be wary of issuers with debt sustainability concerns.

In November, Ghana expects to launch its first 2 bn social bonds, becoming the first African sovereign to issue GSS debt.

The result of this issuance may open the door for future African sovereign issue...

On August 12, Zambia celebrated general elections, featuring the third face-off between incumbent President Edgar Lungu and opposition candidate Hakainde Hichilema.

UPND opposition candidate Hichilema went on to win the presidential election by a landslide.

Total turnout was one of the highest ever recorded in the country with 71%.

President Lungu conceded the defeat and committed to complying with a peaceful transition of power.

General Elections are less than a month away, and there are increasing concerns about violence during the event.

Democracy has suffered a setback during Lungu’s first term, and the upcoming event could further undermine the legitimacy of institutions.

Amnesty International has denounced attacks on freedom of expression and peaceful assembly from the ruling party.

The Democracy Index, estimated by The Economist Intelligence Unit, qualifies Zambia as a hybrid regime, characteristic of government with high levels of autocracy and corruption.     

An agreement with the IMF, and an acceleration ...

International copper prices have soared in 2021, averaging 9,701 USD/ton in June, a 24.6% increase since the beginning of the year.

The volume of Zambian copper exports also increased, to 386.9 thousand mt sold between January and May 2021, a 6.7% increase against 2020.

The boost in copper revenues has had a positive impact on economic activity, commercial balance and government fiscal balance.

The primary fiscal balance between January and April stood at 0.4% of GDP, and the overall balance closed at -1.1% of GDP.  

Bonds have remained mostly unchanged, as holders wait for the results of the August general ele...

After more than a year of expansionary monetary policy and low rates, doubts arise as to whether Africa's central banks will be able to maintain it

Amid concerns about the reactivation of the economies, inflationary pressures arise that put pressure on the monetary authorities

Central banks, which tend to act collectively, maintain a policy of greater tolerance to inflation to stimulate economic growth

Zambian authorities reached a broad agreement with the International Monetary Fund (IMF) towards an Extended Credit Facility.

However, the multilateral institution stated that, to resume negotiations, authorities must implement the policies previously agreed.

National Assembly and executive cabinet were dissolved on May 13, marking the kickoff of the electoral campaign for the general election of August 12.

The controversy surrounding the postulation of incumbent President Lungu, and the complete renewal of the electoral roll is tainting the event.    

We focus on the largest African commodity exporters within the EMFI universe, which would benefit from the current price boom.

The benefits of a bull commodity cycle will enhance liquidity buffers and help improve fiscal accounts, but getting countries back on a debt sustainability path takes more than that.

The emerging countries that benefit must take advantage of the tailwinds to undertake structural changes that can improve long-term solvency.

Zambia’s real GDP shrunk 3.0% in 2020, in line with our own estimation, and less than the IMF forecast of 3.5%.

PMI recorded values below 50 across Q1 2021.

The inflation rate stood at 22.7% YoY in April 2021, way above Bank of Zambia’s (BoZ) target.

We forecast real GDP growth of 2.0% for 2021 and an inflation rate of 22.2%. 

ZAMBIN 24 has performed well in the last month, supported by positive developments in the negotiations between the IMF and the government regarding a new lending program.

Zambia's debt is moved by progress in talks with the IMF or the increase in the price of copper

Although the fiscal outlook is very complicated, the net impact of a new commodity cycle could be an increase of up to 15% on GDP

For holders of Zambian government securities, the best thing now is to wait and see how the positive factors of the MFI and the commodity cycle affect an eventual negotiation.

The kwacha’s exchange rate has stabilized around 21.6 USD/ZMW, after having lost more than 1/3 of its value vs the dollar since the pandemic started.

Foreign exchange reserves stood at USD 1,177 mn in February, a -14% YoY variation.

The current account closed 2020 with a positive balance of USD 2,320 mn (12% of GDP) an increase of USD 2,175 mn from 2019.

The financial account recorded a capital outflow of USD 2,653 mn, mainly in deposits from non-financial corporations and households.

Bonds remain flat, while IMF talks continue but expectations of a pre-election deal ease

Commodity prices have performed spectacularly after the chaos of March 2020: Precious metals (+ 25%), Gas (+ 66%), Oil (+ 254%), Copper (+ 93%) and Coal (+ 74%)

Some short-term conditions such as the stimulus packages of the main economies, inflationary risks and the weakness of the dollar promote a rise in real assets

Increased industrialization in India and the maintenance of government spending at high levels, support the boom in the long term

For now we know that there is a rise in prices, but there is no certainty that there will be a supercycle of several years because all the long-term factors are variable

Of...

Zambia finished 2020 with an overall fiscal gap of -8.5% of GDP, matching the result from the previous year.

Total government debt rose to USD 18.8 bn (98.2% of GDP), a YoY increase of 11.0%.

Since the official assistance requested to the IMF, virtual meetings between local authorities and the IMF Staff were held from February 11 to March 4, but the discussions ended without a formal decision.

In November 2020, the G20 countries and the Paris Club agreed on a common framework to deal with LICs with debt problems

The common framework seeks to provide more comprehensive support that goes beyond the pandemic shock

The key differences with the DSSI are that it has no time limitations, and requires both private sector involvement and IMF engagement

Zambian authorities agreed to take on a 73% stake in Mopani Copper Mines from the Swiss company Glencore.

The movement was agreed with a loan from Glencore to the Zambia Consolidated Copper Mines Limited for USD 1,500 mn.

At the end of the 3Q-2020 external debt stood at USD 12,360 mn (65% GDP).

The mining industry accounts for 12% of Zambian GDP and more than 80% of its total exports.

General elections will be held on August 12.

Incumbent President Edgar Lungu from the Patriotic Front will run for reelection and face the main opposition candidate of the last six elections, Hakainde Hichilema of the United Party for National Development.

Despite the conversations with the IMF, the elections will likely put pressure on the fiscal budget, and we expect a primary deficit of -1.8% and an overall balance of -6.7%.

The recent spike in Covid-19 cases raises concerns about the economic recovery. We expect a real GDP growth of just 1.2% in 2021, an improvement over the -2,3% 2020 forecasted contraction. &nb...

Emerging markets faced massive capital flight as a result of the COVID-19 crisis.

However, there has been debate as to whether the severe initial shock was primarily the result of an interruption in liquidity flows and not the deterioration of macroeconomic variables.

Growth in emerging economies may have taken a permanent hit but, at the same time, emerging markets could become more attractive to those hunting for yield.

We believe that the deepness of the impact of the pandemic on EMs can be quantified.

On December 8, 2020, Zambia requested a financing arrangement to the IMF.

At the end of 3Q20, the overall fiscal deficit was ZMW 19.7 bn, -5.7% of GDP.

In September the external debt stock rose to USD 12,360 mn (65% GDP), a YTD increase of 10% compare to the beginning of the year (48% of GDP).

Domestic debt reached USD 5,929 mn in September, putting the total government debt stock at 96.4% of GDP.

Our expectations for an IMF agreement have improved since our last report. 

Zambia became the first African country to default external debt since the COVID-19 pandemic, after missing a coupon payment from the ZAMBIN 8 ½ 2024

IMF estimates a -4.5% GDP contraction in 2020, as a consequence of COVID-19 pandemic, and a recovery of 0.6% in 2021

External debt reached USD 11,970 bn in June 2020, approximately 63% of GDP, putting the country in a very delicate situation

Finance Minister Bwalya Ng’andu present to the National Assembly the 2021 budget, projecting a fiscal expansionary policy for 2021, which is planned to be funded with new government debt

In previous reports, we covered the cases of Ecuador, Belize, and Suriname, and how they employed standstills to face the consequences of the COVID-19 pandemic. Now Zambia is seeking to join the club.

The Zambian government announced this week that it obtained debt service relief from the China Development Bank (CDB) under the umbrella of the DSSI.

So far, the agreement does not cover all of 2021 and only includes the China Development Bank, but the expectation is that it could be extended to cover the whole of 2021 and the EximBank.

Negotiations with bondholders have not gone as well. There is a meeting scheduled for Nov...

Pressure grows on China, as one of the world's main creditors, to enter the DSSI without restrictions

The terms of China's agreements with emerging or frontier nations are extremely aggressive compared to members of the Paris Club

One issue to keep an eye on is the participation of Chinese state banks in the renegotiations, as these entities hold about 75% of the country's total debt

Chinese authorities have spoken with 20 countries about the DSSI, and it has approved relief for an amount close to USD 3 bn for 10 countries

Angola and Zambia are the countries that most urgently need to address a restructu...

The push to force private sector participation in the G20 Debt Service Suspension Initiative (DSSI) has mostly receded by now.

Rating agencies have recently made explicit that they won’t consider DSSI participation, in itself, as negative for credit ratings.

Recent academic studies show that restructuring debt owed to private creditors has a material long-term adverse effect, but a similar treatment of official debt doesn’t.

Some analysts believe that merely qualifying for the DSSI may have a material adverse effect over credit spreads.

If this is so, and DSSI participation does not lead to private secto...

The process of defaulting and restructuring usually involves a sharp spike in yields just before the credit event.

Then yields lose their economic meaning and only prices make sense, as they turn into a summary of market expectations for the recovery values.

This period ends when an exchange takes place and the old bonds are replaced by new bonds with a given exit yield

One year after the agreement, yields fall on average 4.1 pp from 12.6% to 8.5%.

This shows that there is potential to pick up price gains by entering a credit just after restructuring, and waiting for spread compression during the first year.

Low interest rates and the hunt for yields of the last decade has left broad swaths of EMs overindebted and vulnerable.

The first half of 2020 is not yet over and we already have 3 countries in default.

The recent record of most defaults on Eurobonds on a single year was 4 in 2017, so 2020 is not far from setting new records.

Eurobond restructuring processes are usually among the most complicated due to the variety of holders and the different interests they represent.

Suriname, Zambia, Belize, Sri Lanka and Angola are in the most risk to engross the default-statistic for the year.

We identified 23 countries that have at least one bond yielding above 10%, a threshold usually associated with sovereign distress.

Among the most distressed credits, first-time defaulter Lebanon is trading between 16.3 and 18.3 cents on the dollar, on account of slow progress on a reform plan.

Argentina’s debt goes in a range of 23.2 to 34.6 cents on the dollar, days after the Fernández administration’s aggressive mid-April proposal to bondholders was publicly rejected by 3 creditor groups.

Ecuador trades between 28.8 and 33.6, after negotiating a coupon standstill that will give the country until Augus...

On a statement published on December 9, the Central Bank of Zambia announced the increase on Statutory Reserve Ratios (SRR) applicable on commercial banks. From December 23, commercial banks will be required to hold 9% of their deposit liabilities as statutory reserves. Currently, the level required is 5%. In addition, banks will be required to maintain the statutory reserve requirements on a daily basis as opposed to the weekly compliance basis. This measure went into effect immediately.

Soon after the measure came into force, the currency climbed 4.3% and so far this week it has registered an appreciation of 6.2%, reaching ZMW 14.4...

November inflation print was the highest in three years and stood at 10.8% year-on-year. Last week, as indicated in our last report, the country's central bank increased its interest rate from 10.25% to 11.5% aiming to contain currency depreciation and keep inflation within the target range (7%, +/-1%). To further complicate things, the low production of copper - whose export earnings constitute 70% of total fiscal revenues – has deepened the kwacha depreciation trend.

On December 1, the Minister of Mines, Richard Musukwa, hosted a meeting with investors to attract FDI to the country's mining sector. Musukwa says he &qu...

On November 20, the Central Bank of Zambia increased its monetary policy interest rate for the second time in the year, in an attempt to contain its currency depreciation and control inflation. The rate went from 10.25% to 11.5%, the highest level since May 2017.

Currently, the central bank faces the trade-off of whether stabilizing the kwacha to help control inflation or to increase economic growth, which has maintained a deceleration trend since the first quarter of 2016. Meanwhile, inflation rose to 10.7% in October, reaching a maximum in at least three years, due to the worst drought in four decades that has been plaguing the cou...

Since the beginning of the week, the kwacha exchange rate has exhibited strong variations reaching a maximum ZMK/USD 14.07, a six-month hike that implies a devaluation of 1.7%. Similarly, the price of their bonds has fallen significantly after importers bought dollars to protect themselves from future depreciation while developing an energy crisis in the country.

Everything indicates that the situation of the kwacha will continue to get worse. Currently, homes and businesses suffer power outages of up to 18 hours a day as a consequence of the severe drought the country is suffering, so the government is looking to import electricity ...

On November 6, the government announced the cancellation of plans for the construction of a copper mine located in the lower part of the Zambezi River, according to press reports. However, some alternative news sites suggest that this information might be false, due to a lack of verifiable official statements.

The project was estimated to cost around USD 494.6 mn. Nonetheless, it would have also involved the deforestation of more than 800 km of land belonging to the Zambezi National Park, about 25% of the park’s area.

The project, known as the “Kangaluwi mine,” had been in plans since 2013, but was questioned ...

On October 23, during 2019 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group (WBG) in Washington DC, Eric Meyer, USA Deputy Assistant Secretary for Africa, commended the Government’s commitment to address the debt situation and for the measures taken to dismantle domestic arrears. Ministry of Finance Spokesperson Chileshe Kandeta disclosed in a statement.

Meyer also wished Zambia the best in its efforts to stabilize the economy and stated that the country should be on an IMF-supported programme. On its part, Finance Minister Bwalya N’gandu reiterated that the Government fully recognizes the...

On September 27, Finance Minister Bwalya Ng'andu presented the 2020 national budget. The 2020 budget targets a 3% growth, an inflation between 6%-8% range and an increase in gross international reserves to a 2.5 months of imports coverage from the current 1.7 months. Also, it includes measures to tackle the fiscal deficit that has recorded the country in recent years.

The government expects to reduce the fiscal deficit to 5.5% from the projected 6.5% for 2019, reduce domestic debt and increase domestic income to 22% of GDP. However, the latter raised doubts in parliament due to a high proportion of “exceptional income&rdquo...

Zambia's  year-on-year inflation  stood at 10.5% in September. This rate is the highest since November 2016. Inflation year-to-date stood at 7.8%, while in the same period of 2018 the print was 5.3%.

The report of the Central Statistical Office (CSO) attributes this acceleration to the increase in food prices, specifically corn products. The variation in food prices was 12.4%, while the prices of other products apart from food moved 8.3% on average.

On the other hand, today Finance Minister Bwalya Ng’andu is expected to present the 2020 National Budget in parliament. According to President Edgar Lungu, this ...

On September 9, the Bank of Zambia (BoZ) expressed its rejection of the constitutional amends proposed by the government that include the elimination of the legal requirement for parliament to approve new government indebtedness.

At the end of August, a constitutional amendment draft was presented to the parliament in which it is also proposed to reintroduce posts for deputy ministers, which had been eliminated under the previous administration, with former president, Michael Sata. The BoZ noted that bringing these post back would represent higher costs for the government, which would trigger a loss of income.

The planned const...

On August 26, the rating agency Standard & Poor’s downgraded Zambia’s debt rating. Both local and foreign currency rating went from B- to CCC +. Previously, on June 23, Fitch Rating had also downgraded the credit rating to CCC. Similarly, in February, Moody’s reduced Zambia’s rating by moving it from Caa2 to Caa1.

In the press release Standard & Poor's stated that: “The downgrade of Zambia’s Issuer Default Ratings reflects the government’s high external financing requirements, combined with a continued fall in official foreign-exchange reserves, constrained access to domestic and ...

During the Monetary Policy Committee (MPC) meeting held on August 19 and 20, the MPC decided to maintain unchanged the interest rate at 10.25% for the second time in the year. The decision seeks to boost the economy, but the committee warned that if inflation does not return to the target range of 6% - 8%, the Central Bank could tighten its policy.

The Governor of the Central Bank, Denny Kalyalya, stated that inflation is projected to remain above the Central Bank. Zambia is also fighting high levels of public debt and fiscal deficit. These factors are likely to feed inflation through a weakened currency, the Monetary Policy Committe...

The British government urged Zambia to declare a food emergency to allow donors to provide assistance after the worst drought in nearly four decades hit farm output and left millions of people facing hunger.

A Southern Africa Development Community report last month 2.3 million Zambians will be food insecure by March, after large parts of the southern and western areas of the country received the lowest rainfall since at least 1981.

When comparing the performance of Zampia with that of the other countries in the region in recent years, the former is not very well stopped. Since 2010 they show an economic slowdown and considerable inflation and only in the last five years an average inflation of 9.4% was obtained.

On October 3, 2017, the IMF published a report that indicated that fiscal problems are the main point against the Zambian economy. “The large fiscal imbalances and the rapid increase in government debt since 2011 have raised concerns about the sustainability of fiscal policies in Zambia (…) fiscal challenges worsened since the second half o...