Context
After defaulting on its debt in November 2020, Zambia is finalizing its debt restructuring. The government especially succeeded in restructuring its Eurobonds on June 11th.
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Restructuring framework
The debt restructuring undertaken by the Zambian authorities in 2021 encompasses external public debt only. It excludes multilateral creditors, as most of them enjoy “preferred creditor status” (given the concessional nature of their loans). In February 2024, Zambia signed a restructuring agreement with its bilateral/official creditors covering the equivalent of USD 6.3 Bn in debt. For the recall, Zambia has undertaken its restructuring process within the architecture of the Common Framework. Endorsed by the G20, this framework aims to ensure:
i) broad participation, involving official creditors not previously part of the established Paris Club process, and also private creditors.
ii) fair burden-sharing between all creditors according to the principle of comparability of treatment (in other words, the debtor country must ensure balance debt treatment from all creditors, whatever their nature).
The objective of Zambia's debt restructuring is to reduce its risk of debt distress to a moderate level over the medium term. Under the criteria defined by the IMF, this concretely means reducing the debt service ratio to 14% of revenues and maintaining it at this level over the 2026/31 period. It also aims to reduce the public debt present value ratio to less than 140% of exports or 30% of GDP. These criteria are defined on the basis of a weak Debt Carrying Capacity (DCC) (see scale and indicators below), according to the latest analysis carried out by the IMF in October 2023.
Eurobonds restructuring In line with the ratios that the country aims to achieve, the government reached an agreement in mid-June and proceeded to exchange its Eurobonds, on which service repayments were suspended on November 2020: • Zambia 5.375 20/09/2022 : USD 750 Bn
Zambia 8.5 14/04/2024 : USD 1 Bn
Zambia 8.97 30/07/2027 : USD 1.25 Bn
These bonds were exchanged for two new securities maturing in 2035 and 2053 respectively.: • Zambia 5.8 30/06/2033 (Bond A) : USD 1.7 Bn
Zambia 0.5 31/12/2053 (Bond B) : USD 1.36 Bn
The debt exchange agreement includes improvements in repayment terms, with a longer amortization schedule that differs from previous obligations, and a reduction in coupon payments, resulting in debt service savings of around USD 2.5 Bn until the end of the IMF program. The restructuring terms differs from that of the bilateral creditors, who offered no haircut but accepted less front-loaded cash. While the Eurobonds creditors’ agreement was deemed in line with the IMF's debt sustainability objectives, the haircut remains relatively limited: it corresponds to USD 840 Mn in nominal terms (around 3% of GDP). The agreement implies a recovery value of around 70-76%, interest accrued during the default period has been added to the nominal value of the new bonds. The agreement includes non-financial clauses (of which precise detailsremain unknown at present), including a reinstatement clause in the event of renewed default. Finally, the agreement also includes an adjustment clause on Bond B. The trigger is conditioned by 2 factors and will be activated if at least one of the two is reached (Upside Case in the table hereafter):
Condition 1 on Debt Carrying Capacity (DCC). This indicator is also used by bilateral creditors in their agreement. The terms of Eurobond B will be revised if Zambia's debt-carrying capacity rises from Low to Medium for two consecutive reviews. This indicator is nevertheless complex, as it does not necessarily reflect an improvement in the country's fundamentals: it takes into account a wide range of variables, including global growth, which is not necessarily correlated with the country's ability to pay. Furthermore, the indicator may be interrupted or modified by the IMF. Un such scenario, it is not legally clear what this means for the restructuring agreement.
Condition 2 on exports and revenues, variables more closely linked to Zambia's ability to pay: the terms of Eurobond B will be reviewed if the three-year moving average of USD exports and USD fiscal revenues(before grants) exceeds IMF projections as laid out in the 1st review of the ECF programme by the IMF, published in December 2023.
If activated, the final maturity of Bond B will be shortened to 2035 and its coupon will increase to 6% from March 2026 and to 8% from September 2031.
Credit risk
The completion of the Eurobond and creditor debt restructuring has improved the country's credit profile, significantly reducing investor uncertainty and supported the progress of the IMF program, in place since July 2022 until August 2025. Yet, Zambia still present a weak credit profile .
Firstly, the relief provided by the debt restructuring remains limited. Financing needs remain considerable in the short term, estimated at over 20% of GDP over 2024/25, and interest payments will continue to absorb around 30% of public revenues in 2024/25. Against a backdrop of still-fragile fundamentals, the country’s financial difficulties might easily resurface, and this will inevitably require increased support from official financial partners (multi and bilateral).
Furthermore, the completion of negotiations with commercial creditors remains necessary to definitely resolve Zambia's debt crisis: based on the latest available data, external public debt owed to commercial creditors totals USD 3.8 Bn.
Lastly, the country is currently facing strong economic headwinds, with unprecedented drought hindering economic growth, export and weighing on government liquidity. This is currently having a major impact on food and energy shortages, as well as on currency supplies. The country has significantly reduced its production of cereals and copper (which accounts for 70% of its exports). The government has launched plans for costly electricity imports and rationing, to support critical economic sectors. The need to import more energy, combined with reduced export earnings from the mining sector due to production interruptions caused by load shedding, will worsen Zambia's current account balance, exerting further pressure on :
Already low foreign exchange reserves (USD 3.2 Bn of FX reserves or 2.6 months of imports based on the latest available figures), given the current account deficit now expected (60.2% of GDP vs. a surplus of +3.7% of GDP initially expected in 2024).
The exchange rate, with the USD/ZMW parity down -12% since early February.
Inflation, which reached almost +15% y/y in May, its highest level for 2 years.
Pressure on the budget, whose limited resources are being reallocated to remedy food shortages, job losses and finance imports. An additional spending plan of around USD 1.6 Bn is currently being drawn up.
All these factors could prevent a significant fall in its debt ratio this year. This latter is estimated at around 115% of GDP in 2023, and could remain at around 110% by the end of 2024.
The shortfall is estimated at around USD 900 Mn (3% of GDP). The authorities plan to cover these costs with the help of international donors. Part of this will be provided by an extension of the IMF program for the equivalent of 300 Mn USD. At the same time, the government is reported to have received pledges totaling around USD 500 Mn from bilateral partners.
Moody's upgraded the country's rating from Ca to Caa2, while S&P and Fitch kept the sovereign in default.
Quick view on Eurobonds: the relatively rapid principal amortization schedule (duration < 3) of Bond A significantly reduces the inherent risk. Bond B incorporates a high probability (around 50%) of activation of the aforementioned trigger.
Perrine GUERIN
