Borders are closed, vaccines are expedited. The Covid-19 pandemic continues to circulate and policy makers continue to react while trying to plan. More fell developments occur, and so more problems require attention.
This past October, the sub-Saharan country Zambia missed a USD 42.5 mln Eurobond coupon payment, the Zambians missed another payment on November 14th, confirming the country to be in technical default. As a smaller developing economy with extreme export concentration, Zambia figures as a stylized situation that could describe the solvency prospects for many other emerging market economies.
The Zambian economy relies substantially on the export of copper and cobalt, which account for roughly 64% of export proceeds. Effects from Covid on the global economy have put a dent on this trade and on the Zambian outlook. The year 2019 was bad enough, with the economy contracting by -6.5% even during the pre-Covid environment. The current year has been more brutal. The International Monetary Fund (IMF) estimates the country’s economy will shrink by -10.4% in real terms through 2020.
As noted, the Zambian situation could prefigure many similar ones, as borrowers and lenders contemplate the magnitude of the world’s “debt tsunami”, a term the Institute of International Finance (IIF) penned to describe the reality of global total indebtedness topping USD 277 trillion as of the end of QIII for this year.
And so, the world financial system’s first responders and technocrats have been grappling, teasing out a diagnosis and a recommendation on therapeutics. Plainly, the debt is too much, so less should be repaid.
Initial efforts undertaken in May of this past year saw the G20 and the Paris Club initiate the Debt Service Suspension Initiative (DSSI). That newly designed protocol allowed 73 countries to suspend payments on bilateral loans falling due in 2020. This November the DSSI was enhanced, offering an updated reprieve until June 2021 and then allowing a stretching out of payments due to be spread over six years. Debt relief would also include the possibility of “write offs”, according to the G20 and Paris Club endorsed “new common framework”.
Notably, the global public policy set was insistent, emphasizing the importance of “comparability of treatment among official and commercial creditors.” In other words, everyone should be all in. And “write-offs” are being bruited – simply for the humanitarian reasons (e.g. difficult trade-offs between debt service and medical supply provisioning during the Covid-19 pandemic) and for the sake of practicality. There just isn’t the money.
Of course, there’s always trouble in the details. The Zambia External Bondholders’ Committee, a body representing investors holding 40% of the country’s outstanding Eurobonds, notes the on the ground murkiness. On the inclination and wherewithal of the Zambian authorities, the Committee declares, “lack of engagement and transparency does not provide for the conditions that would otherwise allow bondholders to consider providing near-term relief…” Not encouraging, even in the context of official overtures from the G20-Paris Club.
So, in the case of the Zambian debt crisis, maybe conditions will become more clear and maybe multi-lateral initiatives such as the G20-Paris Club will exert good effect. For borrowers and lenders alike, the old estimation of “capacity and inclination” figures importantly – that estimation informs everyone what a country can do and what it can’t, and provides an appreciation of what a country is prepared to do, when faced with bills to settle.
The Zambian situation may be writ large across many emerging markets coping with the effects of Covid and dealing with their own limited economic breadth and resources. The “first responders”, of course, meaning the IMF notably, will intercede and deliver support, as they can. Stressed debtor countries will decide on a case by case basis what may be possible and palatable to do. It’s incumbent on investors to carry out due-diligence, accordingly.