Zambia has finally ended nearly four years of default on its dollar bonds, issuing two series of restructured notes that were the product of intense negotiations.

The southern Africa nation became the first in Africa to renege on its obligations during the pandemic in November 2020, setting the stage for what would become a complex restructuring fraught with setbacks. The latest development means Zambia has now become the first globally to successfully use the Group of 20’s Common Framework mechanism to restructure its eurobonds alongside debts it owed to other governments, the biggest of which was China.

“Today is a historic day for Zambia as we complete the restructuring of our eurobonds. This significant accomplishment in our debt restructuring puts Zambia back on track to achieve sustained growth and prosperity for all,” Finance Minister Situmbeko Musokotwane said in a statement. “We are grateful to the bondholders for their cooperation in finding a resolution, as well as all our international partners who made this achievement possible. As we get closer to closing this chapter, we remain committed to strengthening our economy and improving the lives of Zambians,” he said.

Still, the milestone has yet to sway credit rating agencies. The three biggest still classify Zambia as being more broadly in default on its external loans because the government is yet to restructure about $3.3 billion in loans owed to commercial lenders that are distinct from eurobond holders. Talks with those creditors — the biggest of which are China Development Bank and Industrial and Commercial Bank of China Ltd. — are ongoing individually, with the group not having a negotiating committee.

Bond Exchange

Earlier this week Fitch Ratings said it would assign a CCC+ rating to the two new eurobonds worth $3 billion that Zambia issued Wednesday, and maintain the nation’s long-term foreign-currency debt at restricted default. The dollar bonds replace three outstanding notes on which the nation owed about $3.9 billion, including past due interest.

Fitch said the rating will remain until the government exits default “with a significant majority” of non-bondholder commercial creditors, and that it expects the completion of restructuring negotiations for those loans by end-2024.

S&P Global Ratings has a similar assessment. It maintains a selective default rating on Zambia’s foreign currency debt because the nation is yet to make good on the $3.3 billion in commercial loans, Max McGraw, primary credit analyst at S&P said Tuesday in reply to emailed questions.

Moody’s Ratings said it will review its assessment after the bond exchange has concluded.

“The reductions in debt and interest rates agreed to by the eurobond holders will mildly improve our evaluation of Zambia’s debt burden and affordability,” John Walsh, a Moody’s analyst, said in emailed responses. “However, the ongoing regional drought, which is hurting agriculture and energy production, puts additional fiscal pressure on the government and increases the likelihood of a re-default.”

Zambia’s worst dry spell in at least four decades has dealt a severe blow just as it claws itself out of default. Corn output fell by 54% this year to its lowest since 2008 and households and businesses only have electricity for half the day because hydropower dams, the nation’s main power source, are running dry.

Bouncing Back

Both Fitch and S&P expect Zambia to bounce back next year as the El Niño-induced drought lifts. S&P estimates growth of 4.6% in 2025 and Fitch 5%, up from about 2% this year.

They also foresee copper production and prices of the metal used in electric vehicles, which Zambia relies on for more than 70% of export earnings, having a big impact on its ratings.

One of the two bonds that Zambia’s issued on Wednesday will see investors repaid by 2032 rather than 2053 if its economy performs better than expected. The government has worked hard on attracting mining investment, which could pay off for bondholders.

“Copper prices and production will likely be a significant factor in whether bondholders see the upside case,” said McGraw. “We expect prices to be supportive over the next few years. Increased investment over time should lead to increased production.”