Zambia’s debt restructuring, which after many false dawns now at last appears close to a conclusion, is a big boost for all emerging market debt and should help draw hesitant investors back to the asset class.
EM bond fund managers have suffered a brutal two years. Inflows have been minimal at best this year. In 2022 and 2023, well over $100bn left the asset class.
Fund managers not dedicated to the sector and end investors have alike been put off for a number of reasons — among them a string of sovereign defaults and the fear of more to come.
To make matters worse, once countries default, the pace of debt restructuring has been glacial.
Zambia had already been in default for three years when it finally reached agreement with bondholders on a restructuring last October. Then that deal collapsed when official creditors including China blocked it in November.
Such a long limbo, observers agree, is absurd and damaging for EM debt as an asset class.
Easing the burden
Last week, a new deal was reached. Investors and development finance experts will have much to say for and against the deal, and whether it leaves Zambia with a sustainable debt load.
But in one respect the agreement is clearly a good thing: it weakens the negative perception of EM debt.
Those still nervous about investing in EM may see Zambia’s deal and be encouraged. Ghana and Sri Lanka could complete their own restructurings soon.
The list of EM governments in default might soon be short and that would renew interest in the asset class, leading to more money flowing into it. That in turn will make funding easier for borrowers, further reducing default risk.
Two obstacles
Slow progress on sovereign debt restructurings has been one of two big warning signs hanging round the neck of EM bonds, scaring end investors away. The other was a lack of primary market access for countries suffering debt distress.
Both needed to be addressed before investors would return, said one syndicate official last week.
Zambia’s deal has ticked the first box. Kenya had already ticked the second in February, when it raised $1.5bn with a new issue, putting to bed fears that it could be heading for default on a $2bn bond maturing in June.
With Ghana and Sri Lanka making progress and other EM sovereigns that were in distress eyeing the primary market, the more positive news flow around EM should encourage investors to put money into the asset class again.
EM is becoming a much more appealing place for investors than it has been for the past two years, and Zambia’s agreement will only add to that.