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Overview of Debt Restructuring Options for Zambia: Pros and Cons of Debt Refinancing

Overview of Debt Restructuring Options for Zambia: Pros and Cons of Debt Refinancing. Presented During An EAZ Public Discussion Forum " Zambia's Debt Situation : What’s the Best Way Forward? ". Venue: Intercontinental Hotel Date: Thursday, 23 rd August 2018. What is Debt Restructuring?.

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Overview of Debt Restructuring Options for Zambia: Pros and Cons of Debt Refinancing

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  1. Overview of Debt Restructuring Options for Zambia: Pros and Cons of Debt Refinancing Presented During An EAZ Public Discussion Forum "Zambia's Debt Situation : What’s the Best Way Forward?" Venue: Intercontinental Hotel Date: Thursday, 23rd August 2018 “Working Towards the formulation of Sound Economic Policies”

  2. What is Debt Restructuring? In principle, restructuring very simple; in practice very hard… • Debt restructuring is a form of debt refinancing that occurs under economic conditions of financial or debt distress. • Because establishing distress can be elusive, commentators often refer to debt refinancing. Others talk about debt re-profiling… • Debt refinancing entails changing the term structure and conditions of an existing debt obligation. It entails replacing a given debt obligation with another debt obligation under different terms and conditions. • Naturally, the terms and conditions of refinancing will vary widely by country or creditor, depending on several economic factors (e.g., current or anticipated risks, national political stability, macroeconomic stability, banking regulations, borrower's credibility (credit worthiness or credit rating), etc.) and international community opinions. “Working Towards the formulation of Sound Economic Policies”

  3. Why Debt Refinancing? In principle, a debt obligation might be refinanced for five reasons: • To improve the structure of interest payments (e.g., reduce the interest rate to reduce payments; or reduce term to reduce payouts). For instance • $750m at 10% per year for 10 years (2012-2021) = $750m in interest (or $1.5b interest + principal); vs. • $750m at 10% per year for 5 years (2012-2017) = $375m in interest (or $1.125b interest + principal); implying a savings of $375m from a shorter term. • To reduce or alter risks associated with the debt; for example, this could be a switch from a variable-rate to a fixed-rate loan. Refinancing under 1 and 2 is generally feasible for strong economies with favourable or robust macroeconomic outlooks. “Working Towards the formulation of Sound Economic Policies”

  4. Why Debt Refinancing? (con’t) Three more of five reasons, in principle, for refinancing a debt obligation: • To consolidate various debts into one loan, which could be longer or shorter term, depending on interest rate differential, fees, and restructuring penalties • To reduce the “bullet point” interest payments, often for a longer term, depending on interest rate differential, fees, etc. (e.g., instead of $750m at 10% per year or $1.5b over 10 years, pay 8% per year over 20 years or $1.95b) • To free up cash for development, which would otherwise go to debt service; often for a longer term, contingent on interest rate differential, etc. Refinancing for reasons in 3, 4 and 5 is usually done by borrowers facing financial difficulty; it help to relieve interim repayment pressures, but comes with economic costs for taking longer to pay off the debt. “Working Towards the formulation of Sound Economic Policies”

  5. Is Zambia Contemplating Refinancing? Why? • Interestingly the MTDS (2017-2019) did not anticipate that Zambia might resort to debt refinancing; focused on managing the risks: • “The redemption profile for external loans will also be considered when contracting new [external] loans to ensure smooth redemption profile by contracting varying maturities appropriately. The aim is to ensure the Average Time to Maturity of 10 years is maintained” [p.4] • On Eurobonds: “In order to deal with the refinancing risk posed by the maturing of the Eurobonds between 2022 and 2027, Govt. will proactively initiate mechanisms aimed at redeeming the Eurobond debt, including implementing the sinking fund” [p.4] • In the 2018 National Budget Address, the authorities contemplated refinancing, but with a grave inconsistency: • “Mr. Speaker, to address these concerns, the Govt. has published the MTDS that seeks to return the debt to low risk of debt distress. The strategy outlines measures to drastically reduce the rate of debt accumulation, attain a cheaper and longer debt maturity profile. In addition, future borrowing will be undertaken strictly within sustainable levels. The strategy also defines measures towards the refinancing of the three Eurobonds and dismantling of the stock of arrears” [p.25] “Working Towards the formulation of Sound Economic Policies”

  6. Is Zambia Contemplating Refinancing? Why? Economic performance remains worryingly subdued, limiting debt repayment prospects… • GDP growth fell as Govt. spending plans grew… (Cheelo, 2018). • Q1:2018 GDP growth (CSO) & current account performance (BOZ) were still worrying. • The burden of debt service is taking its toll: Out of every K1.00 of domestic revenue collected in Q1:2018, 36 ngwee (36%) went to interest payments (Nalishebo and Banda-Muleya, 2018). Zambia’s ability to exit the external debt market is now very limited… “Working Towards the formulation of Sound Economic Policies”

  7. Other Country Experiences with Refinancing • In 2007, Gabon used some of its Eurobond proceeds to buy back 15% of it Paris Club debt at a discount. • In 2011, Senegal issued a 10-year $500m Eurobond, replacing a 5-year $200m bond from 2009 & allowing it to extend the maturity term; the balance ($300m) was planned for financing future infrastructure projects in transport & energy. • In 2007, Ghana issued a 10-year $750m 8.5% coupon rate Eurobond & in 2013, a second 10-year $750m 7.875% rate Eurobond. Soon after the second issue, Ghana invited holders of the 2007 bond (due in 2017) to exchange their holdings for up to $250m of the new 7.875% notes due in 2023. The interest differential between the 2007 bond (8.50%) & the new Ghana 2013 Bond (7.875%) translated into an estimated annual savings of $1.375m. • In 2014, Jamaica raised a $800m 7.625% coupon rate debt from international capital markets, with proceeds earmarked to pay off a €150m bond with a higher interest rate of 10.5% that was due at end-Oct 2014. • In 2015, Ghana issued a 15-year $1b bond, albeit at a high coupon rate of 10.75%, with a $400m World Bank guarantee, to refinance its existing debt, in particular the 2007 Eurobond set to mature in 2017. “Working Towards the formulation of Sound Economic Policies”

  8. Feasible Refinancing Options for Zambia • Consolidate similar external debts (the 3 Eurobond) into one loan & extend the term to maturity, like Ghana in 2013. Negotiated interest rate differential, fees, and restructuring penalties will depend on economic factorsesp. macroeconomic (fiscal) stability and credibility (credit rating)) & international opinions. • Negotiate longer terms to maturity so as to reduce the “bullet point” interest payments; roll the debt forward (negotiating interest rates is difficult as they are international markets determined). • Negotiate debt buybacks using multilateral (IMF, World Bank, AfDB) or bilateral (China, UK, USA, Russia) partnership support. For instance, Zambia is eligible for $1.3-1.5b from IMF, which could be used to redeem up to half of the Eurobonds when or before they fall due and replace them with near-zero interest rate loans. “Working Towards the formulation of Sound Economic Policies”

  9. Pros and Cons of Refinancing, by Options Debt consolidation & terms to maturity extension so have similar pros & cons as they both essentially work within the commercial markets to change the composition and/or term structure. Pros: • Offers interim relief as Zambia would not have to pay back $750m in 2022, $1b in 2024 and $1.25b in 2027. Cons: • Over time, economic burden can be heavy: recall e.g., instead of $750m at 10% per year or $1.5b over 10 years, pay 8% per year over 20 years to 2032 or $1.95b so pay an extra $450m… • Will require painful reforms (e.g., spending/borrowing cuts, public sector downsizing, etc.), which the Govt. might be unwilling or unable to do… • Building policy consistency and credibility can be hard for the Govt. “Working Towards the formulation of Sound Economic Policies”

  10. Pros and Cons of Refinancing, by Options • Debt buybacks using new multilateral or bilateral creditors. Pros: • Offers greater relief than a simple market-based restructuring… Cons: • Requires painful reforms, which the Govt. might struggle with… • Insulation from predatory debt (or creditors) is difficult… “Working Towards the formulation of Sound Economic Policies”

  11. In Closing…. Conclusions: • Refinancing is feasible for Zambia; • It may be inevitable, given current macroeconomic conditions; • It may offer huge relief if done right and with the right partners; • But will imply persistence with painful reforms, and • It has the downside risks such as predatory debt (we can get it wrong!) Recommendations: • To address a key strategic gap, the authorities need to devise a deliberate refinancing strategy and annex it to the MTDS (2017-2019). • To rebuild confidence & credibility, the authorities need to improve: (i) fiscal discipline in line with Zambia Plus; (ii) debt reporting; and (iii) preparation for and engagement with IMF. “Working Towards the formulation of Sound Economic Policies”

  12. Lk out for more from ZIPAR with CSPR Town Hall Meeting: “Mid-year budget performance, public debt & service delivery” on 30th August 2018 at Taj Pamodzi Hotel, Lusaka “Working Towards the formulation of Sound Economic Policies”

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