Zambia needs to manage Eurobond interest payments

Edgar Lungu
President Edgar Lungu

Zambia’s government needs to devise expenditure strategies that will cushion the impact of three Eurobonds interest payments totalling US$240mn annually

Zambia successfully issued a US$1.25bn Eurobond in July at a coupon rate of 9.375 per cent with an average life span of 11 years with three equal redemption payments due in July 2025, 2026 and 2027. According to the Zambia Institute for Policy Analysis and Research (ZIPAR), interest payments for the three Eurobonds will increase to more than US$240mn annually by 2022.
ZIPAR also proposes that the government should consider venturing in high economic yield projects to mitigate the impact of payments on Eurobond interest.

“Government also needs to improve administration and should in particular tap into new high-economic-return projects. It will also be prudent for the government to rationalise spending on non-priority areas,” ZIPAR observed.

ZIPAR noted that the latest Eurobond comes on the backdrop of a depreciating Kwacha, which is about one-fifth less than its value in January 2015; a much higher-than-budgeted fiscal deficit; a widening trade deficit reflecting falling export revenues due to lower copper prices; challenges with the mining tax regime; and declining non-traditional exports.

“While the third Eurobond should provide some respite for the weakening Kwacha, and is also expected to reduce the reliance on short-term expensive domestic debt, ZIPAR warns that higher interest payments on Eurobonds are likely to crowd out public investment and social spending,” said the ZIPAR statement.
Shebo Nalishebo, research fellow at ZIPAR, said, “When funding is invested well, there can be benefits to international borrowing.

However, the risks also need to be managed. One such risk is the cost of paying the interest on a growing debt and how that can reduce government investment in services such as health and education.”
In a paper titled Zambia’s $1 billion debt issuance: a perspective, Raja Bobbili, a US-based Zambia-born investor, says that there will be many critics of the latest Eurobond issue, given that Zambia issued a similar bond three years ago at 5.625 per cent.

“The issue is a step in the right direction. That money should be used to fund much-needed infrastructure and other investment needs that will support our economy well into the future. But on any account, this is a smart move. America’s central bank is set to increase interest rates; the cost of borrowing in the future could be a lot higher than it is today,” argues Bobbili.

Bobbili noted that there are two undeniable factors to consider in the bond’s favour. First, investors in the US get very low interest on their cash, which means they have been scrambling for good interest rates elsewhere in the world. Second, this global hunt for yield means countries like Zambia can issue debt and attract a lot of institutional interest.

Nawa Mutumweno