Still too soon for investors to go back in the water

Seven months after Zambia defaulted on $3bn of Eurobond debts, Western investors are warming up to the country once again. Bets on Zambian Eurobonds have driven prices back to pre-pandemic levels and international players such as Bank of Nevis have bought up stakes in the country’s banking industry.

Ratings agency Fitch upgraded the country’s long-term local currency debt in April, enticing some foreign investors to return to Treasury Bill auctions. It’s possible to paint a positive short-term scenario.

Copper, Zambia’s primary export, is trading at record highs, boosting government revenues. Plans for a global issuance of IMF Special Drawing Rights promise to double Zambia’s foreign currency reserves overnight. The kwacha – which has lost half of its value since the Covid-19 pandemic struck – may finally stabilise and inflation may subside once pre-poll giveaways end following the 12 August elections.

But to imagine that Zambia has turned the corner overlooks the damage wrought by President Edgar Lungu and the ruling Patriotic Front (PF) over the past five years as well as the considerable challenge that lies ahead, regardless of who wins the vote.

The next government will need to secure a new IMF programme, negotiate complex debt restructuring, and repair relations with copper miners to guarantee the industry’s long-term future. Central to all three tasks is restoring the country’s credibility and rebuilding trust with outsiders.

Last October, the finance ministry requested a six-month payment standstill on Zambia’s Eurobonds, but then failed to fully answer creditors’ questions about other borrowing and arrears, or to detail the future path to debt sustainability. This bred mistrust: bondholders feared that the state had something to hide and sensed that they might lose out to other creditors. The PF’s intransigence paved the way for sovereign default.

Now bondholders are insisting that Zambia enter an IMF programme as a prerequisite to debt restructuring. Relations with the Fund have been strained ever since August 2018, when the PF pressured its last resident representative – Alfredo Baldini – to leave.

His replacement, Preya Sharma, has taken over, and the contours of a new staff monitoring programme appear to be emerging. The IMF has made it clear that the government needs to commit to detailed policy steps.

‘Wild West’

Fears of hidden loans and outstanding arrears could yet stymie negotiations, so too could Zambia’s acquisition of Mopani Copper Mines from Glencore in January, which doubled government-guaranteed debts owed by public enterprises.

State-owned miner ZCCM-IH paid a nominal $1 to acquire a 90% stake in Mopani, giving it total control over operations. The firm also assumed responsibility for $1.5bn of debt incurred by Mopani’s parent company, Carlisa, committing a proportion of future sales and profits to repay that sum – a process that could take between 10-17 years, according to mines minister Richard Musukwa.

Increasing Zambia’s public and publicly guaranteed debts was the price of poor relations with foreign miners. The government clashed with Glencore when the commodity giant attempted to shutter Mopani in April 2020, invoking force majeure amid the pandemic. The ruling PF quickly mobilised to defend some 15,000 jobs in its political heartland by threatening to revoke Glencore’s mining licence and detaining Mopani’s CEO, Nathan Bullock, as he attempted to leave the country.

Such intimidation echoed moves against Vedanta Resources in May 2019, when the state placed Konkola Copper Mines in provisional liquidation, accusing its owners of lying about investment in mine expansion and disputing tax payments. Two years on, the multibillion-dollar dispute remains unresolved, with arbitration pending and questions lingering over how long the state can hang on to the asset.

Vedanta has stated willingness to invest $1.5bn in Konkola. Without a settlement, or the entrance of a new strategic partner to invest in the mine, production will decline, and the asset will deteriorate, causing Zambia to miss out on high copper prices on global markets.

These are risks that foreign investors would be reckless to ignore; they would be wise to listen to a former finance minister, Felix Mutati, and five of his peers who last year expressed fears that Zambia was becoming akin to “the ‘wild west’, where the application of the law and work of statutory bodies is arbitrary and political.”

“Who will invest in a country where assets can be seized, or contracts are irrelevant?” they asked in an open letter.

Uphill battle for Hichilema

Unsurprisingly, Mutati is backing Lungu’s rival, Hakainde Hichilema, for the presidency. Hichilema leads the United Party for National Development (UPND) but faces an uphill battle to win power this August after Zambia’s electoral commission decided to drop its existing voter register and compile a new one – in just over a month, during the rainy season, and amid a global pandemic.

With the onus on citizens to pre-register online and travel to a registration centre to complete the process, rural voters have reportedly been disenfranchised in the UPND’s southern and western heartlands, where farmers were busy preparing their fields.

The opposition will also struggle to mobilise supporters in urban areas after the electoral commission barred campaign rallies, fearing a spike in Covid-19 transmission rates, and then introduced temporary restrictions on political roadshows in the capital Lusaka, citing an escalation in violence.

The outcome of the election will determine whether Zambia has a leader who can set the country on a new trajectory, or whether the hostility that the ruling PF has exhibited towards bondholders, the IMF and foreign mining companies is set to continue. Investing in the country is a shot in the dark until the Zambian government adopts a more constructive stance in its negotiations with outsiders.


Nick Branson is Director at Gondwana Risk


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