China still cares what the world thinks about it – and that will help Africa to limit the danger of contagion from an increasingly likely Zambian debt default.
A committee representing Western holders of Zambian bonds on 30 September rejected the government’s request to delay interest payments. The bondholders fear that they are not being treated on equal terms with Chinese creditors.
Yet a Zambian default wouldn’t have a wider impact on investor confidence in African debt, says Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore. “China wants to avoid further negative public relations” related to its Belt and Road Initiative and to “preserve strategically important relationships”, which includes Zambia due to its large mineral reserves.
Hanke points to Angola, where China has agreed to provide relief over and above what was promised under the G20’s Debt Service Suspension Initiative (DSSI). The Chinese foreign ministry has said the agreement should be ready soon. Private-sector creditors have for now been spared a restructuring, notes Hanke.
Chinese wider commercial and political interest in Africa means that it has a track record of treading softly in debt renegotiations.
The China Africa Research Initiative (CARI) points to a lack of evidence that China has used court arbitration over unpaid loans, or resorted to asset seizures. “China is unlikely to jeopardise relations by pursuing these methods in the future,” says CARI.
Zambia’s debt problems have long been well known and predate COVID-19.
- The significance of the Zambian case, Hanke argues, is that it serves as “the first precedent” for private sector involvement (PSI) in debt relief under DSSI, with previous recipients choosing not to include commercial debt.
- “There has been an emphasis from the G20 and IMF on PSI, and it appears they drew the line here on not wanting to bail out private creditors for a country with an unsustainable debt burden,” he says.
- “So for other countries in or at the verge of distress who are seeking bilateral or multilateral relief or funding, this raises the likelihood that PSI will be a precondition.” That will “increase anxiety market anxiety” for these countries, says Hanke.
China retains the power to alleviate Lusaka’s fiscal woes, says Nick Branson, director of Gondwana Risk in London. He detects a shift in Beijing’s stance following criticism from G7 finance ministers over its participation in DSSI.
- China Exim Bank is now willing to offer Angola a debt holiday under the DSSI, engaging on the same terms as official creditors.
- “If Beijing extends the same debt relief to Zambia, then the government would be better positioned to honour its obligations,” says Branson.
- Still, he notes, Exim Bank’s lending would rank as senior to commercial debt, putting bondholders at the back of the queue in the event of sovereign default.
Yields on many African eurobonds were already at distressed levels well before Zambia asked to suspend payments, notes Branson. The choice has been to take painful action now or kick the can down the street.
- “Governments such as Senegal and Côte d’Ivoire that were quick to participate in the DSSI have gained fiscal space at the cost of being locked out of the market this year,” says Branson.
- “Others such as Ghana and Kenya have prioritised the ability to issue or rollover sovereign bonds, which could be a costly mistake” if yields are still high when they want to borrow.
In the long term, the sustainability of Zambian debt will revolve around the use to which borrowing is put.
- “The problem at the end of the day is not so much around debt contraction per se but utilisation of debt resources, and whether they can build local productive capacities,” says Gabriel Pollen, a senior researcher at the Centre for Trade Policy and Development in Lusaka.
- “If that is the case, then debt repayment will not be problematic.”
African countries should know their worth in negotiating with China – and put any breathing space they can get to productive use.