China is damping Zambia’s efforts to come out of default
Beijing’s standoff with global bond investors over $3 billion of Zambian debt is damping the African nation’s efforts to come out of default, and challenging the effectiveness of the International Monetary Fund-backed blueprint on sovereign restructurings for poor countries.
The fund’s executive board on Wednesday approved an $187 million disbursement to Zambia, after saying earlier this month that the government is making progress and good faith efforts toward reaching a deal with private creditors.
But talks with bondholders are far from resolved, which the IMF warned could hurt its economic recovery as it holds up a comprehensive restructuring.
The dispute stems from China’s rejection last month of a proposed deal between Zambia and bondholders partly because of a misunderstanding about the scale of losses private lenders would take. The African country’s overall restructuring is being pursued under a Group of 20 initiative known as the Common Framework, unveiled three years ago to help poorer countries overhaul loans with all creditors — sovereigns as well as bondholders and commercial lenders.
The episode highlights the difficulty multilateral institutions like the IMF and G-20 have faced in their attempts to incorporate China into the US-led global financial system, particularly given Beijing’s role as the biggest single sovereign lender to developing nations, many of which are now saddled with record-high debt payments.
At the core of the dispute is the concept of “comparability of treatment” — which aims to extract comparable terms of debt relief for all creditors. That requirement was included in the terms of the Common Framework, which is why China has been able to scuttle the deal with the group of bondholders, which includes Amundi (UK) Ltd., Farallon Capital Management and RBC BlueBay Asset Management.
Beijing in late November balked at the group’s deal that would see private creditors taking similar cuts to official sovereign creditors on the present value of their loans, but getting larger repayments sooner than the official lenders. In addition, there has been also disagreements around how to compare different extensions of payment schedules and losses between different creditors.
Talks have stalled and no breakthrough is expected soon, according to people familiar with the situation.
Economic Recovery
China’s Export–Import Bank, which represents the country on the official creditors committee, and Finance Ministry didn’t respond to request for comment. A spokesman for the IMF said its “supportive of debtors and creditors finding a solution and has continued to provide technical analysis to help inform the negotiation.”
Mercedes Vera-Martin, the IMF’s mission chief for Zambia, said in a briefing Wednesday about the restructuring delays that “the longer it takes, there will be a higher impact.”
“It could put at risk Zambia’s economic recovery,” she said.
The continued debt overhang and falling mining production in Africa’s second-biggest copper producer has sunk its currency to record lows, driving inflation to a 20-month high of 12.9% last month.
The IMF is providing input on whether different proposals meet debt sustainability and program targets, but isn’t involved in deciding what constitutes “comparable” treatments, Vera-Martin said, adding that the fund hopes the engagement and momentum between the government and bondholders will continue.
Part of the issue stems from a working paper prepared in June for Zambia’s official creditor committee, led by China and France, that showed private bondholders could take cuts on the present value of their loans up to 10 percentage points bigger than sovereign lenders, according to the people, who asked not to be identified describing private conversations.
After China’s Exim Bank got approval from authorities in Beijing to agree to a deal based on those assumptions in June, the final proposal from bondholders that emerged last month had a much smaller cut, which Exim Bank rejected, according to the people.
China is also concerned that bondholders stand to profit under the proposal as the coupon on their bonds is higher than the interest rates on Chinese loans and that many bondholders bought the bonds at a low price, standing to benefit from a deal, according to one of the people.
Complicating issues in the background is that two other large Chinese state lenders to Zambia — China Development Bank and Industrial and Commercial Bank of China — are both classified as commercial creditors rather than sovereigns, meaning the payments they ultimately receive will be impacted by the bondholder deal.
Bondholders last month proposed taking a 40% reduction in the present value of their loans, compared with 39% for the official creditors. One source involved in the negotiations said a 44% cut by all commercial creditors, including bondholders, would be more acceptable to most members of the official creditor committee.
Zambia’s Ministry of Finance said in a response to questions that it’s “hopeful that the government will reach a successful conclusion to the restructuring of its external commercial debt in early 2024,” and is considering various measures to ensure it services commercial loans.
