Zambia takes measures to help Financial Institutions in response to COVID
Africa’s second-largest copper exporter was already burdened by high fiscal deficits and foreign debts heading into the crisis; Zambia’s budget balance was approx. a deficit of 17.6% of GDP with foreign exchange reserves representing import cover of only eleven weeks (Source: Fitch Solutions, June 2020). The COVID-19 pandemic has further constrained the sovereign’s external liquidity. Reflecting this risk, both Fitch and Moody’s downgraded Zambia’s long-term issuer ratings in April (to CC and Ca, respectively), citing the increased likelihood of a default event. Since then, the country has hired Lazard’s as advisor on a formal ‘liability management’ mandate in negotiations with its private creditors and to help approach the IMF for support.
The trickle-down impact of these sovereign issues on “inclusive financial institutions” like MFIs is unsurprising – namely, rising arrears, borrowing costs and local currency hedging costs. Institutions with significant government payroll lending books have particularly suffered, with arrears increasing as the government consistently remits late monthly payments to lenders due on behalf of its employees. These arrears persisted pre-crisis, and also have been exacerbated by the crisis. Liquidity implications for these institutions have been immediate, especially with regards to staying compliant on regulatory prudential ratios.
Acknowledging the stress on its financial institutions exacerbated by the pandemic, since April the Bank of Zambia (“BoZ”) has implemented a series of “relief” measures, notably for MFIs:
- ZMW 10 billion (approx. USD 500 million) “Targeted Medium-Term Refinancing Facility”, representing 3-5 year debt financing available to restructure or refinance existing facilities or for new eligible on-lending;
- Temporarily allowing eligible NBFIs to partially use capital instruments not ordinarily qualifying as common equity Tier 1 and Tier 2 capital, for purposes of computing regulatory capital;
- Extended transitional period to amortize the “Day 1” impact of IFRS 9 impact from 2020 out to 2022, for capital adequacy purposes; and
- Encouraged use of alternative distribution channels such as contactless mobile banking aimed at minimizing in-person contact, reducing physical cash and decongesting banking halls while at the same time advancing financial inclusion among vulnerable communities.
To date, there has been a proactive collaboration between financial institutions and the BoZ to actualize these measures, notably with several instances of drawdown on the Refinancing Facility to provide essential liquidity support. In July, the BoZ also successfully issued ZMW 6.8 billion (USD 375 million) of long-dated “COVID” bonds as part of a wider fiscal and monetary stimulus package to support increased economic activity during the crisis. This spend has included partially satisfying arrears owed to payroll lenders. Satisfying such arrears to lenders directly influence economic activity by resuming on-lending to capital-starved SMEs and public sector employees, the latter of which use the funding for essential expenses and to support their informal secondary businesses that also provide critical income generation.
Combined with the positive signalling from its proactive engagement to restructure sovereign debts and approach to the IMF, these specific stimulus measures not only improve investor confidence but also provide liquidity that directly supports the real economy during these difficult times.
Source: Bank of Zambia, Bloomberg, Financial Times, Fitch Ratings, Moodys and The Business Telegraph