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The ‘blood, sweat and tears’ behind Zambia’s default

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When Zambia sold the last of its three US dollar bonds in 2015, it capped a decade in which the copper-endowed African country went from needing debt relief reserved for the world’s poorest nations to tapping the global capital markets with ease.

But just five years later, that bond is in default, with the rest of Zambia’s $3bn international bond borrowings, after President Edgar Lungu’s government skipped a $42.5m interest payment due last week in the middle of fraught negotiations on restructuring its debt.

Africa’s first bond default during the coronavirus pandemic — and its first ever default on multiple US dollar bonds at the same time — “risked setting a more adversarial backdrop” for those talks, bondholders said this week. With an IMF visit due next month over a potential bailout, direct discussions with bondholders are yet to be scheduled.

Mr Lungu’s government, which is battling for re-election next year, has blamed coronavirus for problems managing its $12bn of debt.

The Zambian kwacha has fallen about a third against the US dollar alone this year as the coronavirus dented demand for copper, and the IMF forecasts the economy could shrink by nearly 5 per cent this year. The G20 group of the world’s largest economies has sought to help poorer countries with their debt problems during the pandemic.

But analysts say the default also illustrates how high-octane borrowing and misrule combined to scupper one of Africa’s fastest-growing economies.

Successive governments in Africa’s second biggest copper producer “went through a lot of blood, sweat and tears” to establish the country as a credible borrower, said Bradford Machila, an opposition politician. For this to end in default in just a few years was, he added, a “massive embarrassment and a huge source of anger”.

Gregory Smith, a strategist at M&G Investments and a former World Bank economist in Zambia, said the “market access came at a time when Zambia had very low debt”, under a third of gross domestic product, and “a wonderful growth spurt”.

The economy doubled in size in the decade to 2015, powered by mine privatisations and insatiable Chinese demand for copper. The economic take-off and the need to tackle high rates of rural poverty led to demand for infrastructure projects that traditional concessional loans for poor countries from lenders such as the World Bank could not meet. Zambia turned to China and other lenders. Mr Lungu, who took power in 2015, promised to transform rural voters’ lives.

Line chart of kwacha per $ showing Zambia’s currency collapses

“Where it goes wrong is they didn’t have the right system for selecting projects,” Mr Smith said. Some were valuable for development, such as a hydropower dam project. Others were more dubious priorities, including a second international airport for the country’s Copperbelt mining region and haphazardly planned highways. “You could argue that Zambia had an investment problem, not a debt problem, in those years,” Mr Smith said.

Now its complicated debt stock has set creditors against each other.

Hours before the default, bond investors rejected a request for a standstill over concerns that Mr Lungu’s government was not coming clean on Chinese debts worth $3bn. The government said that bondholders were getting the same treatment as Chinese and other creditors that it had already defaulted on.

Bwalya Ng’andu: ‘If I pay [bonds], the moment I pay, the other creditors are going to put dynamite under my legs and blow off my legs. I’m gone. I can’t walk any more’
Bwalya Ng’andu: ‘If I pay [bonds], the moment I pay, the other creditors are going to put dynamite under my legs and blow off my legs. I’m gone. I can’t walk any more’
The Zambian kwacha has fallen about a third against the US dollar this year as coronavirus wreaked havoc
The Zambian kwacha has fallen about a third against the US dollar this year as coronavirus wreaked havoc © Emmanuel Mwiche/AP

“If I pay [bonds], the moment I pay, the other creditors are going to put dynamite under my legs and blow off my legs. I’m gone. I can’t walk any more,” finance minister Bwalya Ng’andu said on state television days after the default. “If I don’t pay the bondholders, my legs will remain intact,” he said.

While Zambia had reached payment deferrals with two Chinese creditors, China ExIm Bank and China Development Bank, for a full debt workout and resumption of market access, it needed dialogue with all creditors, Mr Smith said.

Mr Lungu is betting that voters will be more accepting than bondholders that the airports and roads built using the debts have been worthwhile. “Zambians will bring me back in 2021 because I have done a lot of works for the country,” he said last month.

President Edgar Lungu meets workers from the Aviation Industry Corporation of China
President Edgar Lungu meets workers from the Aviation Industry Corporation of China © Dawood Salim/AFP/Getty
Kenneth Kaunda International Airport in the capital, Lusaka
Kenneth Kaunda International Airport in the capital, Lusaka © Waldo Swiegers/Bloomberg

Mr Lungu’s bid for re-election was already shaky because civil society activists and opposition parties regard it as a de facto attempt at an unconstitutional third term and may mount challenges in court. He became president during the first term of his predecessor who died in office. Mr Lungu then won a poll in 2016. He insists he has served only one term. More recently, a set of constitutional changes that would have increased his powers, known as Bill 10, failed to win support from lawmakers.

Default “doesn’t really affect him politically,” said Trevor Simumba, a Zambian analyst of the country’s debts. If anything, Bill 10’s failure meant that Mr Lungu “must spend more on patronage projects” for the polls, including a recent fourfold rise in fertiliser subsidies in the national budget, he said.

Analysts say that Mr Lungu could press the central bank to buy domestic state bonds to fund spending. That will complicate Zambia’s quest for a bailout from the IMF that Mr Lungu once scorned. Analysts doubt that the fund will be able to secure a commitment to fiscal belt-tightening before the polls.

Mr Lungu “just wants to buy time” rather than seriously rethink how Zambia uses debt for development, Mr Simumba said. “The focus of everything, even the request for relief, has been aligned to the election . . . when they manage to win the election, then they are going to have to take the hard decisions.”

Additional reporting by Tommy Stubbington in London



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Emerging Markets

South Korea looks to fintech as household debt balloons to $1.6tn

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South Korea Economy updates

After her family business of ferrying drunk people home was hit by closures of bars due to Covid-19 curfews and social distancing, Lee Young-mi* found herself juggling personal debts of about Won30m ($26,000).

The 56-year-old resident of Suncheon in South Korea was already struggling to pay off or refinance four credit cards, but now faces the prospect of those debts rapidly multiplying after her husband was diagnosed with cancer.

“We’ve had little income for more than a year as not many people are out drinking until late into the night,” said Lee. “Now my husband won’t be able to work at all for the next three months after his surgery.”

Lee’s story is playing out across Asia’s fourth-largest economy as self-employed workers, who make up nearly a third of the labour force, have seen their incomes reduced sharply due to coronavirus restrictions. Now, after struggling for years to keep a lid on household debts that hit a record Won1,765tn ($1.6tn) in March, Seoul is looking to fintech companies and peer-to-peer lenders for answers. 

Chart showing increase in South Korea's household debt

Among them is PeopleFund, which touts tech-based investment products backed by machine learning that allow borrowers to refinance their higher-interest loans from banks and credit card companies.

The company has loaned at least $1bn to more than 7,500 customers since it was established in 2015. Its products allow borrowers to switch their debts to fixed-rate, amortised loans at annual interest rates of about 11 per cent, a change from the riskier floating rate, interest-only loans common in South Korea. 

PeopleFund has received about Won96.7bn in financing from brokerage CLSA, and along with Lendit and 8Percent is one of the first among the country’s 250 shadow banks to win a peer-to-peer lending licence. 

“The country’s most serious household debt problem is with unsecured non-bank loans, whose pricing has been too high. We can offer more affordable loans to ordinary people unable to receive bank loans,” Joey Kim, chief executive of PeopleFund, told the Financial Times.

The proliferation of digital lenders and fintechs in South Korea, where higher-risk borrowers are often cut off from bank financing, has been encouraged by the country’s government.

“We hope that P2P lenders will help resolve the dichotomy in the credit market by increasing the access of low-income people to mid-interest loans,” said an official at the Financial Supervisory Service.

South Korea’s household debt situation has become more pressing since the onset of the pandemic, with increases in borrowing for mortgages, to cover stagnating wages and to invest in the booming stock market. South Korean households are among the world’s most heavily indebted, with the average debt equal to 171.5 per cent of annual income.

South Korea’s household debt-to-GDP ratio stood at 103.8 per cent at the end of last year, compared with an average 62.1 per cent of 43 countries surveyed by the Bank for International Settlements.

Much of the new debt has been risky. Unsecured household loans from non-bank financial institutions were Won116.9tn as of March, up 33 per cent from four years ago, according to the Bank of Korea, much of it high interest loans taken out by poorer borrowers.

Getting on top of the problem has taken on national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risked triggering a sell-off in markets and a rapid debt deleveraging.

“If financial imbalances increase further, this could dent our mid-to-long-term economic growth prospects,” BoK governor Lee Ju-yeol said in July.

The country’s economic planners, however, are struggling to contain debt-fuelled asset bubbles without undermining South Korea’s fragile economic recovery.

The government has attempted to address the danger by tightening lending rules. Regulators in July lowered the country’s maximum legal interest rate that private lenders can charge their customers from 24 to 20 per cent.

Economists caution that rising debt levels increase South Korea’s vulnerability to an economic shock. 

They also warn that the asset quality of financial institutions could be hit by a jump in distressed loans when the BoK rolls back monetary easing, expected in the fourth quarter.

“Monetary tightening is needed to curb asset bubbles but this will increase the household debt burden, holding back consumption further,” said Park Chong-hoon, head of research at Standard Chartered in Seoul. “The government is facing a dilemma.”

For Lee Young-mi, however, the 11 per cent rate offered by the PeopleFund is still too high. “I am not sure how to pay back the debt.”

*The name has been changed



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European and Chinese stocks rise after calming words from Beijing

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Chinese equities updates

European shares chased gains in China after calls from Beijing for greater co-operation with Washington helped sooth jitters over a regulatory crackdown in the world’s biggest emerging market.

Europe’s Stoxx 600 index rose 0.7 per cent on Monday to hit new all-time highs, while the UK’s FTSE 100 rose 1 per cent led by economically sensitive stocks including banks and energy groups. London-listed lender HSBC gained 1 per cent after it reported second-quarter figures that easily beat analysts’ expectations.

The gains came after the China Securities Regulatory Commission, Beijing’s market regulator, called on Sunday for closer co-operation with Washington, stressing the country’s efforts to improve transparency and predictability after a crackdown on tutoring groups obliterated the market value of the $100bn sector’s biggest companies.

Chinese listings in the US have become a geopolitical flashpoint as Beijing has sought to exert greater control over the country’s powerful tech sector. The US Securities and Exchange Commission said on Friday that Chinese groups that sought to sell shares in America would be subject to stricter disclosures.

Shares in China rebounded after their worst month in almost three years, with China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed blue-chips rose 2.6 per cent on Monday, while Hong Kong’s Hang Seng index added 1.1 per cent. The city’s Hang Seng Tech index, which tracks big internet groups including Tencent and Alibaba, reversed early losses to rise 1 per cent. Futures tracking Wall Street’s benchmark S&P 500 index climbed 0.6 per cent.

Last month, China’s cyber-security regulator announced plans to review all foreign listings by companies with data on more than 1m users after top leaders in Beijing called for an overhaul of how the country regulates initial public offerings in the US. The crackdown came just days after the $4.4bn listing of ride-hailing group Didi Chuxing.

The intensifying scrutiny of how Chinese groups access capital markets has pummelled stocks, delivering the worst month for China tech groups listed in the US since the global financial crisis. The Hang Seng Tech index fell 17 per cent last month.

“While we do not consider it prudent to completely avoid investments in China, further volatility can be expected until the first quarter of 2022, by which time we believe most regulatory changes may already be in place,” analysts at Credit Suisse wrote in a note on Monday.

Meanwhile, data released by China at the weekend showed that factory activity grew at the slowest pace in 15 months in July as demand contracted for the first time in more than a year.

Government bonds were steady with the yield on the benchmark German 10-year Bund, which moves inversely to its price, gaining 0.01 percentage points to minus 0.45. The equivalent US 10-year yield was steady at 1.234 per cent.

Bond yields have been falling in recent weeks, despite higher than expected inflation readings in the US and indications from the US federal Reserve last week that it was moving a step closer to the day when it would start tapering its $120bn in monthly asset purchases.

The euro rose 0.1 per cent against the dollar to $1.1885, while the pound gained 0.1 per cent to purchase $1.3924. Prices for global oil benchmark Brent crude fell 1 per cent to $74.66.

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Turkey battles to quell wildfires as residents and tourists flee

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Turkey updates

Turkey has contained more than 100 wildfires after a series of blazes near its Mediterranean coastline killed six people and forced thousands of residents and foreign tourists to flee holiday resorts, the government said on Sunday.

Winds gusting at 50km per hour, low humidity and temperatures hovering near 40C have made controlling the fires difficult, Bekir Pakdemirli, the forestry minister, said on Twitter and in comments reported in state-run media.

The fires began on July 28, and the simultaneous start of so many conflagrations raised suspicions they may have been deliberately set, Pakdemirli said, although he did not offer evidence of arson.

About 100 Russian nationals were evacuated from the Bodrum peninsula in western Turkey on Saturday and moved to hotels elsewhere, the Russian consulate in the city of Antalya said in a statement, according Sputnik, a Russian state media outlet. Local tourists were also among the evacuees, with some forced to leave by sea as the blaze cut off other escape routes.

Flights from Russia, Turkey’s biggest source of tourists, only resumed in late June after Moscow suspended charter trips amid a record outbreak of Covid-19 cases in Turkey in the spring. Coronavirus-related travel restrictions to Turkey have hammered its tourism sector, which directly and indirectly accounts for about 13 per cent of gross domestic product.

Villagers water trees to stop the wildfires that continue to rage in the forests in Manavgat, Antalya, Turkey © AP

The forestry ministry website showed at least 15 active fires on Sunday. Villagers and forestry workers were among the six people who died, according to Turkish media. Mehmet Oktay, mayor of the resort town of Marmaris, said one volunteer firefighter had died and another 100 people had been injured in a spate of fires that have scorched more than 10,000 hectares near the town.

A half-dozen fires continued to sear areas mostly inaccessible by road, and the number of blazes across Turkey meant not enough firefighting planes were available, he said. “It’s heartbreaking, and I am fighting back tears to concentrate on the emergency at hand. It will take more than a decade to restore this land,” he said.

Thousands of farm animals and untold numbers of wild animals also perished in the fires, which one meteorologist estimated reached 200C.

Wildfires are an annual occurrence in south-west Turkey’s pine forests, and one expert told CNN Turk television that 95 per cent are deliberately or accidentally sparked by people.

Yet the scale of the current conflagration is remarkable, and some are blaming climate change for the disaster. Turkey recorded its highest ever temperature in a south-eastern town last month, and much of the country has been gripped by drought this year, while deadly floods struck north-east Turkey last month.

Several other Mediterranean countries are battling blazes this summer, including Cyprus, Greece, Lebanon and Italy, and scientists have said the extreme weather events across the globe this summer may be the result of global warming.



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