Zambian Debt Analysed by Kampamba Shula

Zambia’s debut Euro-bond sale has opened the way for record issuance that risks overstretching government borrowing less than seven years after Africa’s biggest copper producer was unable to pay its debt.
Zambia, which had more than $6 billion of loans canceled by creditors including the World Bank by 2006, raised $750 million with its first international sale in September 2012. As much as $4.5 billion of international bonds are now planned by companies from the nation’s power utility to its railway operator and road builder, while municipalities are seeking to follow a maiden debt sale by the capital, Lusaka.
Debt may jump to more than 35 percent of gross domestic product if all sales go ahead, Richard Odumodu, head of fixed income at London-based Silk Invest Ltd., said by phone Jan. 30. Zambia’s borrowings rose to 27 percent of the country’s $19.2 billion economy at the end of 2011, according to data compiled by Bloomberg. The government is financing road, rail and power projects to pull the nation, ranked 164th of 187 countries on the United Nation’s Human Development Index, from poverty.
The World Bank started canceling $37 billion in debt for up to 40 of the poorest countries in 2006, scrapping $2.7 billion owed by Zambia that helped bring its borrowings down to $500 million in July of that year from $7.2 billion a year earlier. The Zambian government is “aware and awake” to its debt obligations and “will not be carried away,” Deputy Finance Minister Miles Sampa said in a Jan. 9 interview.
The yield on Zambia’s Eurobond due September 2022 rose to 5.12 percent on Feb. 1 from a record low of 5 percent on Jan. 25. The 12-basis point increase compares with a 23 basis-point jump in rates on Nigeria’s $500 million dollar-denominated bonds due January 2021 to 4 percent. Average emerging-market yields have climbed 4 basis points since reaching a record low of 5.39 percent Jan. 23, according to JPMorgan indexes.
Zesco Ltd., the power utility, may seek $1 billion to $2 billion in local and international debt, including bonds, this year, while Zambia Railways Ltd. plans to sell $500 million of debt in the next six months. The Lusaka City Council wants to raise $500 million in bonds, with municipalities including Solwezi and Livingstone possibly following and Zambia’s Roads Development Agency is planning a $1.5 million issuance.
Zambia’s debt is rated B+ by Standard & Poor’s, or four levels below investment grade, while Nigeria is ranked a level higher. The Zambian kwacha weakened recently extending losses this year to 3 percent.

Zambia’s economy will probably expand 8.1 percent this year, from an estimated 7.3 percent in 2012, and 7.6 percent in 2014, boosted by mining and agriculture, Ricardo da Camara, a fixed-income analyst at Paarl-based NKC Independent Economists, said in reply to e-mailed questions Jan. 22.

Nigeria, Angola and Ghana plan to sell as much as $3.75 billion in international bonds this year, the most from the continent ever, as governments try to benefit from demand that has driven borrowing costs to historic lows.
Zambia’s debut bond was in high demand because before the sale, the country had low debt levels, which are quickly changing, Razia Khan, head of African research at Standard Chartered Plc (STAN) in London, said by phone Jan. 10.
There is a “sense of positive exuberance,” Charles Mate, the managing director of Stockbrokers Zambia Ltd. said Jan. 18 by phone from Lusaka. “Now everybody wants to issue a bond.”

Economeka Analysis

The sense of exuberance that has been referred to is evident given that companies like Zesco, Zambia Railways, LCC and Zambia Road Development agency are all looking to issue bonds. Unlike our Bloomberg counterpart Economeka is more positive about the debt that these parastatals are looking to issue. Unlike the debt that was cancelled by the World Bank this debt is strategically aimed at pulling Zambia out of poverty.
Now there are going to be certain parties (I am not referring to politics though it does apply) who will spin this increased debt into a situation of worry and blame on the current government. Economeka’s stance is and will always be impartial and pragmatic; we look at the facts first.
In economics there is a term we call an externality. It’s not that complex it refers to the unintended effect of an economic activity like a production of a good or service; it can be positive or negative. For example an externality of mining companies in the copper-belt is the sulphur that is produced as a byproduct into the atmosphere; in this case the externality is negative. Now back to the topic at hand the externalities of the bond issuance of these parastatals looking to build on roads, rail and energy outweigh any negative externalities.

The table below summarizes this viewpoint

Advantages	Disadvantages
Jobs to be created	Increased Zambian Debt
Better transportation of Goods and services	Higher borrowing cost for Zambia
More Energy Production
Better local housing

 As you can see from the table above, the advantages far outweigh the disadvantages. There are however certain words of caution that these parastatals need to be aware of going forward. Firstly, these companies will be entirely responsible for the payment of this debt and will not be able to make the Zambian government directly liable even though the Zambia government owns these companies. Secondly, these companies will be responsible for getting their accounting books in order so that bond holders may be at ease with their investment. In other words these companies may need a period of financial advisory. The Zambian government went through 2 years of financial advisory before it issued its inaugural bond last year.

As long as these parastatals have their books in order and are able to pay back the coupon and principal of the bonds they wish to issue, this could be the best thing that has happened to Zambia in a long time.

Now the most important question is of course where is all this money going to be used. The Lusaka city council has indicated that the money will be spent on building 500 residential flats in all the 5 districts of Lusaka, the assumption here is that other municipalities will follow suit.

Zesco will obviously spend money on increased power generation after coming under a lot of fire from the public over constant power disruptions.

Zambia Railway will look to spend money on bolstering its Eurobond finance to restructure the railway system in Zambia.

Zambia Road development agency will be looking to also bolster its Eurobond finance to complete more essential transport routes throughout the country.

They view from Economeka is we fully support what the companies are trying to do and only wish they have their books in order and wish them the best of luck in their endeavors.