Zambia bondholders slam IMF debt relief targets as ‘arbitrary’

Zambia bondholders slam IMF debt relief targets as ‘arbitrary’

Written by Rachel Savage

LONDON (Reuters) – International bondholders in Zambia have criticized the International Monetary Fund’s debt restructuring framework as “arbitrary” and excluded the country’s domestic debt, sources involved in the process told Reuters.

Zambia has been in default for nearly two years, and a debt sustainability analysis published by the International Monetary Fund last week called for the debt service-to-export ratio to be lowered to a 140% “threshold” from 153% fast to 84% by 2027.

โ€œNow, all of a sudden, they have an arbitrary number of 84%,โ€ said Kevin Daly, head of emerging market debt at Abrdn, who chairs a panel of bondholders estimated at around 45% of Zambia’s $3 billion international debt. .

“How did you come up with this number? It’s a different number from the threshold (140 percent),” he told Reuters, inviting the IMF to meet with bondholders, who complained of being left out of the loop like the IMF and IMF. Bilateral creditors devised a plan.

An IMF spokesperson said it would brief Zambia’s creditors on economic outlook and policies and denied that the 84% debt-to-export target was “arbitrary”.

โ€œThe target is firmly anchored in the IMF and World Bank Debt Sustainability Framework for Low Income Countries,โ€ they said in email comments. “It is consistent with the level of external debt to exports of a country that has room to absorb shocks.”

Analysts view Zambia’s much-overdue debt restructuring as a test case for what is expected to be a series of defaults in poor countries that have borrowed heavily not only in the capital markets but also from countries including China.

David Malpass, president of the World Bank, the sister organization of the International Monetary Fund, said last week that “a significant debt reduction of 45% in terms of net present value (NPV) … is essential.”

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Dilution of this size “would not be acceptable (of) creditors,” Daly said, including Chinese lenders.

He declined to say what other bondholders would agree to, but said that in his view, “If it’s more in the range…20-30%, I think that would be acceptable.”

He said a bond redemption of $65 to $75 with an exit yield of between 11 and 12 percent was “realistic.”

A second source involved in the process said the bondholders were also unhappy that $11.6 billion of local currency debt, of which $3.2 billion was owned by foreign investors, was excluded from the restructuring.

The person, who is familiar with the committee’s position but spoke on condition of anonymity, said it was implicit that such debt would effectively take precedence over Eurobonds, which are governed by international laws.

He also questioned whether it was right to include local currency debt that is not subject to restructuring in debt targets, because it “presses on the amount of debt service available to service external debt.” However, he said the bondholders were “aware” that domestic debt restructuring could cause problems in Zambia’s banking sector.

An International Monetary Fund spokesman said that “the authorities’ intention was to exclude these bonds from the restructuring.”

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