Download zambia*s eurobond debt management

ZAMBIA’S EUROBOND DEBT
MANAGEMENT
Miss Zulu Sarah
INFORMATION COMMUNICATIONS UNIVERSITY
SIN 1301248613
INFORMATION AND COMMUNICATIONS UNIVERSITY
SCHOOL OF SOCIAL SCIENCES
FINAL YEAR PROJECT PROPOSAL
An assignment submitted in partial fulfillment of the requirements for
the BA Degree in economics and finance
Assignment No.1
Student details:
Sarah Zulu
1301248613
[email protected]
0969739427
TABLE OF CONTENT
CHAPTER ONE
1.0. INTRODUCTION…………………………………………………………. 3
1.1 BACKGROUND ……………………………………………………………..3
1.2 STATEMENT OF THE PROBLEM ……………………………………….4
1.3 PURPOSE OF THE STUDY………………………………………………...4
1.4 RESEARCH OBJECTIVES ………………………………………………...4
1.5 RESEARCH QUESTIONS ………………………………………………….5
1.6 RESEARCH VARIABLES…………………………………………………..5
1.7 SIGNIFICANCE OF THE STUDY …………………………………………6
1.8 CONCEPTUAL FRAMEWORK……………………………………………6
1.9 SCOPE OF THE STUDY…………………………………………………….7
1.10 LIMITATION OF THE STUDY ………………………………………..7
1.11 OPERATIONAL DEFINITION …………………………………………8
CHAPTER TWO
2.0.LITERATURE REVIEW……………………………………………………..9
2.1 GLOBAL PERSPECTIVE …………………………………………………..9
2.2 REFIONAL PERSPECTIVE ………………………………………………...10
2.3 ZAMBIAN PERSPERCTIVE………………………………………………...11
2.4 PREVIOUS STUDIES………………………………………………………….11
2.5 COMPARATIVE STUDY ……………………………………………………. 12
2.6 RESEARCH GAP ………………………………………………………………12
CHAPTER THREE
3.0.RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
3.2 TARGET POPULATION ………………………………………………..
3.3 SASMPLING TECHNIQUES …………………………………………… 13
3.4 NSTRUMENTS FOR DATA COLLECTION …………………………..13
3.5 PROCEDURE FOR DATA COLLECTION ……………………………. 14
3.6 DATA ANALYSIS TECHNIQUES ………………………………………. 14
3.7 TRIANGULATION ……………………………………………………….. 15
3.8 ETHICAL CONSIDERATION …………………………………………… 15
3.9 REFERENCES……………………………………………………………… 16
RESEARCH TITLE
ZAMBIA’S EUROBOND DEBT MANAGEMENT
1.0.INTRODUCTION
Zambia attained the status of lower middle income country from being a highly indebted poor
country, this was after the long term outstanding debts were cleared off by the international
monetary fund in the year 2011, this action alone saw many countries in Southern Sahara almost
debt free for the first time in history. The seemingly improved status comes with its own price
such a limited number of concessional loans and grants. This has influenced the move by most
African countries to plunge into the international financial markets.
Zambia with a very low government debt in history decided to delve into the international
markets, which was a no go zone in the past and the first Eurobond was issued in 2013.
The word Eurobond has many implications but in this paper Eurobond is defined as bonds that
are sold in countries other than the country of the currency denominating the bonds (Jeff 2008)
They are not necessarily denoted in Euros because all of the three Eurobonds issued by the
Zambian government have been quoted in united state dollars.
Public debt management is an issue that needs urgent attention because it puts a lot of critical
economic components in a limbo, and a default would bring harm to our developing economy
and also weaken the countries reputation and discourage investors.
Zambia being a country that is just learning diversity of industries, is still being supported by the
copper industry that translates, any shaking in the price of copper has a direct and indirect effect
on the country’s economy. This paper will highlight the need to have effective debt management
structures, it also will endeavor to highlight the effect debt has on economic growth in
developing countries and lastly the reaction from the general populous will be highlighted.
1.1 BACKGROUND
Eurobonds also known as foreign/sovereign bond is an concept that is old but only got
introduced in Southern Africa in the early 2000 and South Africa being the first southern African
country to issue out foreign bonds. The Eurobond market started in the Euro zone countries such
as Greece, Germany, Europe etc
1963 has been accepted as being the beginning of Eurobond market, which began with US$15m,
with 15 year maturity Autostrade issue for the Italian motorway network believed to have
happened around July.
Today the market has made great strides, the market celebrated 50 years in 2013, and African
countries have started to tread these waters, “Eurobonds also known as foreign/sovereign bond is
a concept that is old but only got introduced in southern Africans countries in the early 2000,
South Africa being the first southern African country to issue out foreign bonds.
Zambia has currently issued three Eurobonds in 4 years the first one was issued in 2013 of $750
and the second Eurobond was quote at $1bn in 2014, with the recent $1.25bn which brings the
total Eurobond debt to $3bn.
Zambia first bond was issued in 2012, a debt issue of $750 million at a debut 5.375% with a ten
year maturity.The second bond followed soon afterwards in the year 2014, this was $1billion
debt at a higher rate of 8.5% still oversubscribed though issued at a higher interest rate and it also
comes with 10 year maturity.
The most recent bond was issued in the early months of 2015, $1.25 billion at 8.98% a rate
higher than the first issue which indicate the economic risky the country is perceived to
carry.And the argument that the Zambian government has presented for seeking debt is that they
are cheaper than domestic financing and offer a longer maturity period. Zambia Eurobond debt is
standing at $3 billion. The maturity for all the three bonds are within the space of three years,
2022-2026, this will see Zambia pay close to $6 billion( principal +interest) to service this debt.
The question on everyone’s mind is the purpose of this study, does Zambia have the capacity to
repay this debt. What measures need to be put in place to avoid a default?
1.2. PROBLEM STATEMENT
The need of developing more effective debt management systems or structures has long been
recognized, according to a statement by bank of Zambia, “The need for enhanced management of
Zambia’s debt has become even more critical following the attainment of Lower Middle Income
status, which limits the scope of sources of concessional loans and exposes the country to more
commercial loans, (BoZ 2015) however the public debt in Zambia is still plaqued by many
hazardeous economic implication and poor utilization of funds that are received this can most
times be attributed to the use of normative approach analysis and dependences of foreign analyst
to prescribe a solution. The need for an effective debt system can not be over emphasized if a
default is to be avoided and if the economy and the Zambians citizens are to benefit from this
move, it is inevitable for debt systems be put in place.
1.3. PURPOSE OF THE STUDY
The research project aims at establishing the need to have effective debt management systems
and to highlight the effect debt defaulting has on an emerging economy.
1.4. SPECIFIC OBJECTIVES
 To find effective debt management strategies
 To investigate the reactions of citizens to the utilization of Eurobonds
 To explain the link between government sovereign debt with economic growth
 To enumerate what would happen in the face of a default
1.5. RESEARCH QUESTIONS
1. What debt management strategies are effective?
2. How do the citizen feel about utilization of Eurobonds?
3. What relationship is there between sovereign debt and economic growth?
4. What would happen if the government defaulted?
1.6. RESEARCH VARIABLES
Research variables are defined as the items to be researched on or the items of concern. A
variable is a characteristic under study that assumes different values for different elements
(Mann,2010). Both qualitative and quantitative variables will be used in this research.
 People’s reactions to the utilizations of the bond
 Effective Eurobond debt management strategies
 Effect of external debt on economic growth in a developing economy
Specific variable for point three are; output (Y), net export, ratio of Eurobonds to Y
1.7. SIGNIFICANCE OF THE STUDY
There has been no definitive study in Zambia on Eurobonds and the implications posed to
economic growth and country’s reputation in a case of a default. Secondly there is a limited
number of studies on the citizens’ reaction. Thirdly there has been neglect on the sustainability of
these Eurobonds and how there is a link with public debt and economic growth
1.8. SCOPE OF STUDY
The research will be confined to the period 2012- June 2016 because this will provide better
analysis and reliable data as it shows a period before Eurobonds, during and post Eurobond
issuance.
1.9 THEORITICAL FRAMEWORK
In a study for sixteen highly indebted countries concluded a negative relationship between external
debt and economic growth.(Cunningham 1993) According to the debt overhang theory, that has
been defined differently, krugman (1988) says that the potentials of repayments of outstanding
facilities fall lower than the igned value. Another theory that will be utilized is the crowding out
theory that discusses the reduction in nation’s capability to finance other investment programs
because the yields have been pushed to service debt.
1.10. LIMITATION OF STUDY
 Lack of funds to conduct research on a wider scale with a lot of samples
 Limited time to look at other variables
 Limited published research on the topic
1.11. OPERATIONAL DEFINITION
 Eurobonds are bonds that are issued for sale outside of the issuer’s home country. They
can be issued in the currency of the foreign country, or another currency. Interest
payments and principal are to be returned to the holder in the currency in which the bond
was issued. In most cases, the interest is paid annually
 Management is defined as the organization and coordination of the activities in order to
achieve defined objectives.
 Public Debt also known as government debt or sovereign debt is all the money
borrowed by the government over the years and not yet repaid, plus the accumulation of
interest on the debt.
 Random Sampling is a sample in which every element in the population has an equal
chance of being selected
 Economic growth is an increase in the capacity of an economy to produce goods and
services, compared from one period to another.
 Sustainability means meeting the current needs of our society in ways that enable future
generations to meet their own needs.
 Citizen is a person who legally belongs to a country and has the rights and protection of
that country.
 HIPC meaning highly indebted poor countries
2.0 LITERATURE REVIEW
Eurobonds have been making news on both the international and local scene, this is a concept
that originated from European countries who are now facing a crisis attributed to economic
meltdown and debt overload. The European countries have tried several methods or system of
solving or cutting down on the high levels of debt that have gripped most countries in the
European zone the most recent method which is still under discussion is the introduction of a
common Eurobond among the countries which has many pros and cons.
2.1 GLOBAL PERSPECTIVE
For the global perspective, we see countries like Greece that is still facing economical
instability, Greece once a soaring economy but according to Wikipedia, it is now plunged in
debt, this depression was triggered by structural weaknesses in the Greek economy and the
revelation that previous data on government debt levels and deficits had been undercounted
(acropolis 2010 ). This example highlights the need to have proper debt management systems if
the government is to pay out debt on time and avoid default which can cause a loss of good
reputation to investors and lenders
Looking at a positive side, we have a good example of proper debt management, an example of
effective debt management that Zambia and other southern African have to emulate is Pakistan,
having faced high debt problem since 1980 which became worse during the 1990s and reached a
crisis point towards its end. However, in the post 99-00 period Pakistan has not only been
successful in averting crisis, it has performed remarkably well in debt management. Much to the
surprise of the international watchdogs, it has improved both the stock and the flow ratios of the
debt by using quantum of debt and debt servicing respectively. (Khan)
These two global examples can not over emphasize the importance of having a debt management
system in an economy, the examples highlight how a lack of proper and effective debt
management can take a high status country into shambles and the second one shows how a
nation in debt crisis can emerge to be a good example.
World over the issue of proper debt management can not be over stated because the same
principal that apply to individuals can be applied to countries economy, at individual level if one
is unable to repay debt owed to the neighbor’s no one will want to lend to the borrower because
of the bad reputation they would have acquired.
2.3 REGIONAL PERSPECTIVE
Bringing this study close to home we have Namibia with a lot of similarities to Zambia and
according to a recent article which highlights the need to have proper debt management
structures in place, the article also highlighted the possible outcomes of not having these
structures in place, Namibia has similarities with Zambia such as a lack of diversity. “the
derivatives of Namibian GDP are few, which make stability and sustainability of high levels of
debt questionable. As Namibia’s economy is not highly diverse, Zambia relies heavily on a very
few industries and mostly on the mineral industry, and the collapse of one such industry could
make it difficult, or even impossible, for the country to pay back its debt. (Brown,2011)
Because of these similarities in the economic status Zambia also faces the same possible pit falls
as Namibia would if no effective debt structures are put in place. It is only imperative to be
proactive in debt management programs to avoid unnecessary defaults.
Economists have diverse methods of solving the issue of debt but one thing they all unanimously
agree to the need to have an effective system to management because of the feedback effect it
has on economic growth and the state’s reputation.
2.4 LOCAL PERSPECTIVE
Zambia’s central bank has noted the importance and need to have effective debt management
structure in place, The need for enhanced management of Zambia’s debt has become even more
critical following the attainment of Lower Middle Income status, which limits the scope of
sources of concessional loans and exposes the country to more commercial loans, (BoZ 2015)
Trevor Hambayi, financial analyst in an article titled zambia’s Eurobond challenge says that the
current rate (yield rate) is an indication of the relatively higher risk the country is perceived to
carry.
The higher interest rates that they require from countries that are perceived as fiscally-unsound
act as a powerful incentive to restore budgetary discipline (Charles 2011). This has been noticed
in the last two bonds, which were issued at a higher interest rate, this is a signal to the instability
of the economy and the urgent need to have a debt management system in place.
Considering the currency price fluctuation, a proper system has to be in place to counter such
shocks, knowing that local currency depreciation would automatically mean the borrowing
country will pay more considering the widening gap in currency exchange.
Amadou (2015) says that heady economic growth may not continue if debt proceeds are only
mostly used for current spending, and debt is not adequately managed. This only confirms the
need to carry out this research and most importantly for the government and the stakeholders to
pay particular attention to debt management in Zambia and southern Africa countries.
Countries like the republic of Seychelles and cote d’Ivoire are also good examples of countries
that lack diversification, Seychelles defaulted on a $230 million while cote d’Ivoire missed a
payment in 2011 on a bond that was issued in 2010.
Zambia institute of policy analysis research said the volatile copper prices on the London metal
exchange makes Zambia’s economy vulnerable because Zambia depends on copper (Lusaka
voice 2015)
2.5 PREVIOUS STUDIES
In a paper by Rowland brown 2011 titled Namibia and Eurobond, discusses how a developing
economy doesn’t need to follow the 40% debt level of developed countries, in the Namibia’s
case, he writes that it is a country that lacks diversity and explains how a shock in the most
depended on industry can make is extremely hard or impossible for the government to pay back
the debt. He also highlights how borrowing internally to service the debt would push domestic
interest rates thus crowding out investment. The article goes on to explains that exchange rate
plays a huge role in the cost of borrowing, bearing in mind that a dollar today will not the price
for a dollar tomorrow. It goes on to highlight that the proceeds should be invested in production
or capital investments and not consumption, because what is consumed can not yield any returns.
Another study on Pakistan, Talha reviews debt crisis and how the country faced a double deficit
and was at the verge of defaulting because of it soaring debt levels both externally and internally.
This debt level exceeded a sustainable level. However in 2000 the Pakistan government was able
to recover due to effective economic management. He goes to explain how increasing export
base and diversity should be attended to. Pakistan was able to reduce debt crisis by having debt
management strategy. He highlights the macro economic factors such as foreign exchange rate,
imports and exports impact sustainability of the debt. He concludes his article by saying that the
issuance of euro bonds and ending of reliance on the IMF are the right decisions. However, given
the vulnerabilities of the economy, fundamental flaws and poverty, it was not the right time to
take such initiatives.
COMPARATIVE STUDIES
Namibia and south Africa shares similarities with Zambia, they all have debt ratio higher than
35% to GDP, and are facing low growth and high inflation. In the 2016 outlook by IJG economic
outlook, details south Africa recent economic slowdown can be attributed to be energy,
commodity prices, currency depreciation and other factors. This economic situation is similar to
what Zambia is facing. The outlook goes on to discuss namibia’s infrastructure challenges, rating
risks and current account weakening and recommends that that caution be applied in managing
of fiscal policy and cut down on luxurious spending because it might spell long term doom for
the countries.
RESEARCH GAP
Most research works done highlight the need for proper debt management and what would
happen if the country’s debt become unsustainable, there is need for more research to focus on
finding the solution and not just highlighting the wrong moves that states are committing.
Highlighting the problems is a great start but not a great end. Future research should explore
ways of managing public debt.
Another gap area is the need for the member countries to participant in carrying out research
themselves rather than waiting for IMF or World bank to carry out research. It is important that
southern African countries should invest in research of such nature because a local perceptive is
different from how foreigners view the situation.
3.0.RESEARCH METHODOLOGY
Research methodology refers to a plan of a research study, how data will be accumulated, how it
will be analyzed and how the results or finding will be interpreted to be useful to the intended
audience such as policy makers, lecturers etc.
3.1. RESEARCH DESIGN
Research design is a plan of a research study, it defines the type of study and data collection
methods. It is a framework that has been created to answer the research questions.
Research design is the blueprint for fulfilling research objectives and answering research
questions. In other words, it is a master plan specifying the methods and procedures for
collecting and analysing the needed information (John, 2007)
The research will use both quantitative and qualitative methods to collect data. Qualitative data
are numerically non measurable, quantitative data can be measured numerically. Most statistical
analysis is based on quantitative data using appropriate measurement of their variables (John
2007) because the research will examine variables that can not be quantified like the reaction of
the citizens and quantifiable variables like debt.
This research will be an exploratory non-experimental research which will use both quantittave
and qualitative data, the research will be conducted in an uncontrolled environment to avoid
biasness and to give participants equal opportunity to be picked. The researcher will use
questionnaire to obtain answers additionally secondary data will be employed.
3.2 TARGET POPULATION
Chuma defines target population as, “any group of individuals that have one or more
characteristics in common that are of interest to the researcher. The target population is Zambian
citizens, academicians and policy makers.
3.3 SAMPLE SIZE
A sample size is basically defined as a small portion or proportion of the population chosen to
represent the general population. 50 individuals will be interviewed using a questionnaire from
different groups of people to draw conclusion from the findings.
3.4 SAMPLING TECHNIQUES
Sampling is the process or technique of selecting a suitable sample for the purpose of
determining parameters or characteristics of the whole population claims John (2005) this
research will utilize stratified random sampling which is defined as samples drawn equally or
proportionately from each stratum and, therefore, the procedure is called stratified random
sampling (John, 2005) because of the different groups the researcher will incorporate in this
research.
3.4 INSTRUMENTS FOR DATA COLLECTION
The instruments for data collection will be primary data collection which is defined as,
approaches to gathering your own original data through a survey and secondary data collection
according to John is said, “Secondary data is data collected by someone else and there is a great
deal available to you from books, libraries and on the web. You can use this data as the main
source for your research or as a supplement to data you collect”.
Questionnaire will be used to conduct a survey and secondary data will be collected from
reliable sources.
3.5 PROCEDURE FOR DATA COLLECTION
process of collecting data which involves transcribing, interviews, reading and reading through
data in order to identify those items which merge” Ngoma (2006). The researcher will conduct a
survey and additionally used already existing data.
3.6 DATA ANALYSIS TECHNIQUES
Data analysis basically deals with extracting meaning from the collected data, it is interpretation
of the findings, qualitative data will be put in charts and tables for easy understanding and for
quantitative data, Stata packages will be used.
Ngoma said, It involves giving meaning to different units of data that emerge by generating
matrices and creating codes using symbols, letters and colours.
Qualitatively data will be tabulated and put in charts.
For quantitative data a statistical package called Stata will be used to analysis and deduce
meaning from the data collected.
3.7 TRIANGULATION
Triangulation is a procedure involved in confirming a hypothesis by gathering proofs from many
sources or utilizing many processes. The information from each process should reinforce the
hypothesis.
To avoid bias finding this research will use different produced for credibility purposes and will
carry out the analysis on different statistical packages to verify the results and findings.
3.8 ETHICAL CONSIDERATION
The participant will be informed of the need of this research, Consent will be granted and
participants will voluntary take part in the research, confidentiality and keeping participants
anonymous will be emphasized to the participants to provide safety of the information released.
REFERENCE
1. Chuuma P.C., Ngoma P.S., Mwansa D.M. (2007) Proposal Writing. ZAOU
2. European Parliament.(2011).eurobonds:concepts and implication. IP/A/ECON/NT/2011PE 457.357 Pg 9
3. Bank of Zambia. (2015).Zambia’s Public debt. Intosai working group.
4. John, L. (2005). Government expenditures and economic growth: the evidence from the
trivariate casuality testing. Journal of Applied Economics, Vol. VIII, No. 1.
5. Madura, J. (2008). International financial management.9th edition.
6. Adams, P. (2015). Africa debt rising. African research institute, Counterpoints.
7. Dehesa,G,D,L. (2011). Eurobonds: concepts and implication. Monetary dialogue,
8. The Economist.(2010) Acropolis now , Greek debt crisis is spreading. Europe needs a
bolder, broader solution and quickly
9. Amadou,SY. (2015).trends and development inafrican frontier bond markets. Policy
paper. Global Economy and development.
10. IJEFI. (2016). Debt overhang versus overcrowding out effects: understanding the impact
of external debts on capital formation in theory.vol.6, issue 1
11. www. ijg_research.net/ijg_economic_outlook_2016_2
12. Cunningham, R.(1993). The effects of debt burden on economic growth in heavily
indebted developing nations. Journal of economic development, 18, 115-26
TIME FRAME
January
Topic formulation
February
Topic refining
March
Literature review
April
Proposal presentation
May
Questionnaire formulation
June
Proposal reviewing
July
Literature review
August
Literature review
September
Questionnaire refining
October
Data collection
November
Analysis
December
Report presentation