Re-structure Eurobond repayment plans

THE acquisition and implementation of Zambia’s Eurobonds is one of the main topics attracting debate among stakeholders in the economy.
In fact, whether the Eurobonds are discussed now or never, the truth of the matter is that between 2022 and 2027 the country will have to repay the money.
A Eurobond is a bond denominated in a currency other than the home currency of the country or market in which it is issued.
Zambia has to date issued three Eurobonds amounting to US$750 million in 2012, US$1 billion in 2014 which are due to be paid in 2022 , 2024, respectively, while the US$1.25 billion issued in 2015 will be due for repayment in 2027.
Some of the companies that benefited from the Eurobonds are Zesco Limited which got US$255 million to implement capital projects, the Development Bank of Zambia got US$20 million to support small and medium enterprises and the Zambia Railways Limited US$120 million for the rehabilitation of infrastructure among other obligations.
Others include Ministry of Health which got US$ 29 million for the modernisation of the University Teaching Hospital, Livingstone General Hospital, Kitwe Central Hospital and Ndola Central Hospital while US$310 million was allocated to the Road Development Agency.
It is therefore, prudent that Government provides a current detailed audit on how the proceeds from the three Eurobonds have been spent.
Last year in December, Ministry of Finance permanent secretary Mukuli Chikuba said Zambia will begin refinancing the Eurobonds worth US$2.8 billion in 2019.
Mr Chikuba explained that the financing of the Eurobonds was expected to reduce the cost of debt servicing for the country.
Nevertheless, the World Bank has observed that implementation of the first two Eurobonds were accompanied by a detailed plan on how the money would be spent while the third one had no such plan.
However, Government availed a statement after the bond was issued that the money would be used for infrastructure development.
In its 10th economic brief titled ‘How Zambia can borrow without sorrow’ the World Bank further explained that where resources have not been linked to specific investment, it is most likely that they have been used to finance Government’s consumption.
It observes that there is not much argument about whether investment in the construction sector is necessary, as Zambia’s infrastructure lags behind that of its counterpart in Southern Africa, but there has been concern about whether the right projects have been selected and if, value for money has been achieved.
“The Eurobond borrowing has increased roll-over risk as the first two bonds will amortize in single bullet payments. Just as the money was received in a single day, it also needs to be paid back in one day and this is a challenge that many African sovereigns that issued Eurobonds shortly after the financial crisis [are faced with].
“In a single day, Zambia will be repaying US$750 million in 2022 and US$1 billion in 2024. The third Eurobond [issued in 2015] has a different structure and amortizes in three equal instalments in 2025-27,” it says.
In November 2017, the spread on Zambian Eurobonds was above other African countries including Ghana which, like Zambia, has tapped international capital markets more aggressively than its peers.
Therefore, the World Bank has advised Government to switch from ‘passive’ debt management to being ‘active’ and to further implement a strategy to reduce the cost of borrowing, extend the terms and diversify the sources of debt funding, by buying back some of the outstanding Eurobond debt in the years prior to its maturity.
As at August 2017, Zambia’s public debt both external and domestic was at K114.9 billion, equivalent to US $12.45 billion and representing 47 percent of gross domestic product.
“Government can reduce the repayment risks especially, that the first two Eurobonds have single bullet payments. Bondholders of existing paper can also be invited to exchange their holdings for up to a stated amount of a new issuance,” it says.
The World Bank is of the view that such a strategy will enable Government pay back existing debt with a new one, meaning that the Eurobonds will essentially get rolled-over.
It, however, says that at times, a buy-back can only be achieved at a premium market price which requires careful analysis of the trade-off between containing repayment risk and reducing cost.
“There are few instances of African sovereigns using sinking funds to repay Eurobond debt. One example is Gabon, which pledged, prior to one of its issuances that it would put a minimum of US$50 million per year in an account held at the Central African Development Bank and managed by the World Bank.
“These funds were to be used to buy back some of the issue. For this issue, the idea was that the design would lower the borrowing cost,” the World Banks says.
On whether Zambia can manage the sinking fund, the World Bank is of the view that the sinking fund method to refinance Eurobonds will not work for Zambia due to its persistent large fiscal deficits which makes savings impossible.
The bank says the refinancing route should be properly explored as the most practical solution considering the inability to save and to build the targeted fiscal buffers because of the huge sum of repayments due.
It is for this reason that Zambia Institute for Policy Analysis and Research (ZIPAR) public finance researcher Shebo Nalishebo says Government should urgently put in place a payment plan to enable Zambia pay back the Eurobond when they mature.
“Zambia is able to pay back the Eurobonds when they mature if, and only if, it puts in place several options for paying back the Eurobonds,” Mr Nalishebo says.
According to ZIPAR, Government requires in excess of K6 billion per annum between now and 2022 to effectively establish and manage a sinking fund in readiness to repay the Eurobonds.
In this year’s budget, Government allocated K100 million to actualise a sinking fund while K800 million and K3.97 billion has been earmarked for 2019 and 2020, respectively.
Mr Nalishebo said that operationalising and appointing an independent fund manager to handle the sinking fund and the refinancing of the Eurobonds is significant for Government to meet its debt obligation.
“Given the challenging macroeconomic conditions, it is unlikely that all the money for the sinking fund will be realised, as rightly observed by the World Bank. Debt refinancing is one such option that could be used hand-in-hand with a sinking fund,” Mr Nalishebo notes.
He advised Government to draw lessons from a number of other developing countries that have refinanced their sovereign debt in the last decade.
To this effect, Government has been advised to identify the sources of volatility in the economy to address the current fiscal challenges being faced.
And University of Zambia director of Graduate School of Business Lubinda Haabazoka says that prudent fiscal management is important in the continuous improvement of investments which are critical in stabilising and boosting liquidity in reserves.
“Considering the current economic environment and our ability to generate revenue, it looks like it will be very difficult for us to repay the Eurobond as it falls due.
“We need to ensure that we instil fiscal discipline and probably cut waste in expenditure with the saved resources going towards the facilitation of the Eurobond debt service,” Dr Haabazoka said.
Therefore, the need for Zambia to effectively manage liquidity challenges cannot be over-emphasised in the wake of the pending repayments of the Eurobonds as the period will put the country’s debt management capacity to full test as the principal settlements on the bonds become due.

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