In its latest edition published on November 20, 2020, the EIU, a UK based specialist publisher serving companies, has said that it foresees China demanding Zambia’s mineral assets in exchange for the huge debt the southern African country owes.
“Zambia lacks an IMF programme, which has helped other countries (like Angola) to restructure billions of dollars of commercial debts to Chinese firms. Zambia’s President, Edgar Lungu, has probably also sabotaged any chance of the country gaining one while he remains in power, as a result of his government’s erratic approach to economic policy,” the EIU reports. “We continue to forecast that China will demand access to Zambian mineral assets in exchange for any deal. Although Mr Lungu has proven unwilling to do any such thing before the upcoming elections, which would damage his political support, given Zambia’s popular resource nationalism, his administration has been laying the groundwork for potential expropriations afterwards, and Zambia’s business environment has declined sharply so far in 2020.”
The EIU however foresees strong resistance to such a transaction from people, both internally and externally.
It also predicts a slow debt structuring from the Zambian government.
“Giving any expropriated mining assets to Chinese companies would be hugely contentious inside and out of Zambia; but should Mr Lungu succeed in his re-election bid, we believe that his control of the security services would allow him to repress any demonstrations against this course of action,” it states further. “Meanwhile, the relations of Western countries and international bodies with his government have been poor for many years, and Zambia would probably ignore criticism from them in favour of appeasing China. Debt-restructuring will be slow and haphazard in Zambia.”
The EIU also anticipates that “China and Zambia will announce a bilateral debt-restructuring programme sometime in advance of the 2021 elections (probably in early 2021) – a development that would help to boost the PF’s chances of remaining in power.
“Until then, the process of negotiating a restructuring of Zambia’s Eurobond debt will remain slow and patchy, and bondholders will work to ensure that they receive equal treatment with China, while Zambia’s government plays for time with bondholders until a bilateral deal with its most important creditor can be reached,” the EIU reports. “Once this has been achieved, we would expect progress to be made with Eurobond holders, and a hard default on this debt will ultimately be avoided, in exchange for higher interest repayments to investors.”
The EIU states that infrastructure development has been hugely responsible for Zambia’s high debt.
“Looming elections and debt owed to China pose potential risks. Debt negotiations will be complicated by the political fortunes of the ruling Patriotic Front (PF) party, whose debt-led infrastructure development programme has been responsible for pushing Zambia into debt distress (which has been exacerbated by the coronavirus-induced global economic crisis since the start of 2020), which faces legislative and presidential elections in August 2021,” the Unit states. “A change of government in Zambia (although this is not our central forecast) might undo or set back any progress made between investors and the present regime, whose heavy borrowing has been controversial at home, particularly its bilateral borrowing from China, its biggest creditor.”
The EIU states that although the Zambian government had said it would treat all creditors equally, “the key issue to the country escaping debt distress remains its unresolved bilateral debt with China”.
“Without a debt-restructuring agreement between the two parties, an IMF-supervised reform programme, which would create a framework to accumulate the funds needed for debt repayments, and which remains a key demand of the bondholders’ committee, will not materialize,” the EIU states. “Zambia’s large volume of bilateral debt to China is ultimately what has pushed the country into debt distress rather than its Eurobond payments, and although Zambia was awarded US$139.2m in debt service suspension by the G20, this did not cover its bilateral debts with Chinese state-affiliated commercial lenders.”
And the EIU states that, “since coming to power in 2011, the PF and (in particular) Zambia’s president, Edgar Lungu, have created significant uncertainty for investors with their erratic governing policies”.
“…including towards the mining industry, which has seen serial changes to the industry’s tax codes in recent years, but also towards its bondholders. According to the ZCM, a significant number of the country’s Eurobond holders are also heavily invested in Zambia’s mining and prospecting firms, and allowing companies to once again deduct royalty payments from their corporate income tax would mitigate some of the losses that Zambia’s creditors will be asked to bear as the country tries to escape debt distress,” states the EIU. “Reforming the tax code would also help to boost construction activity and (eventually) production over the 2021-25 forecast period, with additional benefits for the country’s job prospects. Nonetheless, we believe that it is unlikely that the government will concede to the industry’s demands ahead of legislative and presidential elections in August 2021. It seems unlikely Mr Lungu would be willing to offer the unpopular mining industry tax concessions before the upcoming elections, as this would damage his political support among the country’s electorate, given widespread resource nationalism, ahead of a tight race.”
