Making a case for the Zambian Government to raise $1.5 billion in a third Eurobond issue to finance 4 key economic segments.

1. Zambia: The Case For
Eurobond 3
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2. Current Debt Status
 Zambia had approx. K48.9 billion of debt (53% external) as of December 2014
 Latest credit ratings from big 3 agencies are:
- Fitch (B, Stable) - S&P (B+, Negative) - Moody's (B1, Stable)
Source: IMF, World Bank
* GDP was re-based in 2013
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0%
5%
10%
15%
20%
25%
30%
35%
ZMK 0
ZMK 10
ZMK 20
ZMK 30
ZMK 40
ZMK 50
ZMK 60
2008 2009 2010 2011 2012 2013 2014
Zambia Outstanding Debt
Debt (ZMK'billions) Debt/GDP (%)

3. …..cont’d
 2012 Eurobond
 $750 million raised
 5.375% coupon
 Attracted over $11bn in orders
 Allocated mostly to road, energy
and rail
 Matures in 2022
 $40 million annual interest cost
 2014 Eurobond
 $750 million raised
 8.5% coupon
 Attracted over $4bn in orders
 Allocated to energy and
transport
 Matures in 2024
 $85 million annual interest cost
 Recent foray into international debt markets has raised $1.75 billion:
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4. …..cont’d
 However, this is a drop in the bucket compared to the investment that is required to
grow key sectors of the economy.
 Some key sectors have not been adequately included in the investment plan
 Especially in light of the fact that 50% of the population is below the age of 15 and
employment growth is not increasing at fast enough rate
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5. Why Gov’t Should tap International Debt Markets for
3rd Time
 Fiscal constraints: Wages are currently consuming over half of the Governments (GRZ)
tax revenues leaving only between 40% and 45% for investment. Overspending on
Maize purchases and pension deficits are adding further pressure.
 Eurobond funds can allow them to focus on unlocking cost savings within GRZ machinery as
well as creating the necessary conditions for broadening the tax base. Will prevent spending
cuts to critical on-going projects.
 Timing: The US Federal Reserve wound down their Quantitative Easing program in 2014.
They are also quite close to raising rates (as soon as US economic data firms up)
which will curb demand for high risk/yielding African debt.
 Although, there is an argument that European QE and China’s economic stimulus could
neutralize the effects of an interest rate hike by the US Fed.
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6. …cont’d
 Cheaper than domestic debt:
 Domestic debt is currently very expensive and puts pressure on the treasury.
GRZ’s over-reliance on domestic debt has also been stalling private sector credit
growth.
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Jan-15
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Apr-15
364 day bill yield & 10 year bond yield vs credit growth
ZMK Bank Loans & Advances (K billions) 364 days 10 year
Source: Bank of Zambia
* Loans and advances data for March and April 2015 not yet out

7. Stipulations
 GRZ needs to put it’s house in order in 2015:
 Optimally price fuel and remove current ‘subsidy’
 Keep Maize purchases within budget (research from 2011 has shown that it is not a
significant factor in winning elections!)
 Complement changes to retirement age by implementing further pension reforms
 Make necessary changes at state-owned entities to unlock savings and efficiency
then dispose of some to raise much needed cash
 Further reforms in terms of regulation and processes in order to make business
ambiance more efficient and easier
 Implement more robust measures to capture more tax revenue from rental income
(tenants will not do this on your behalf!)
 2015 needs to be about cost cutting, efficiency and raising cash. If impetus
to do this is not there then then the bond should not be issued.
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8. How Much Should be Raised?
 Should look to raise at least $1.5 billion in Quarter 1 of 2016
 Implications:
 Total debt will increase by $1.5 billion to just below $10 billion, ceteris paribus
(below 40% of GDP)
 Debt service costs will increase depending on coupon
 Sequential Eurobond maturities with $750m repaid in 2022, $1bn repaid in 2024
and $1.5bn repaid in 2026 will put pressure on budgets in those years
 If Kwacha continues to weaken against the US dollar, interest costs would rise
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9. Where it Should be Invested
 $500m Allocated to Internet and Communications:
 Internet has not received enough focus/investment by GRZ and should be one of the
priority sectors because it has tremendous applications across all sectors.
 Sector is also heavily taxed despite the heavy capital expenditure requirements. On
top of all this, the country’s geographical position (landlocked) keeps it far away
from under-sea cables. Consequently, internet costs are quite high.
 Zambia needs further investment into ICT infrastructure around the country as well
as tax incentives stimulate further investment by private companies. This would
significantly cut down business costs as well as increase connectivity countrywide.
E.g. It’s commendable to erect mobile towers in rural areas but service providers won’t
be motivated to set up and operate their equipment on them (costly) because they cant
make as much money there as they can in densely populated urban areas like Lusaka
which have wealthier users. Tax incentives required!
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10. …cont’d
 $500m Allocated to Rail:
 $120m from Eurobond 1 was not enough to revamp rail sector. Need further
investment into technology, staff training and other core assets.
 Would boost cargo and passenger revenues as well as relieve the pressure on
newly minted road infrastructure.
 Would also boost inter-regional trade (cementing ‘hub’ status) and efficiency.
 This would also put the sector in a better position to win cargo business from
mining/cement companies who are ramping up production.
 Investment in this sector will pay for itself in the long run
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11. …cont’d
 $300m Allocated to Venture Capital Program:
 Current ‘Youth Development Fund’ format very limited and not doing well (millions in
defaulting loans)
 Identify (rigorously) 5 high potential locally owned businesses in each priority sector
(manufacturing, agriculture, tourism and construction). Take 15 to 20% stake.
Incubate/support them and help with financing needs. Dispose of stake via IPO after
firms start growing profitably.
 Create backlinks with selected universities by identifying top talent which can be put
on educational track armed with the right skills to work in (or at the very least gain
internship experience) at one of the companies in priority sector.
 Execution requires transparency and delegation to foreign/domestic private sector
players who understand dynamics of priority sectors domestically as well as on a
global basis.
 Would boost youth employment as well as stimulate growth in capital market activity
(more jobs).
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12. …cont’d
 $200m Allocated to Construction in Rural Areas:
 Construct better quality housing/facilities for government workers (health,
education, police) in rural areas so that more quality hires would be willing to
relocate there. Could be powered by solar.
 Target areas should have a certain critical mass of people as well as economic
growth prospects.
 The idea is to boost service delivery and make rural areas more attractive to work,
live in, invest in etc. so as to increase economic activity and job growth there.
 This also complements the Link 8,000 road project.
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13. Return on Investment
 Rewards will start being reaped in 5 – 10 year horizon:
 Cheaper internet and increased connectivity countrywide boosting various sectors
from education to business
 Job growth (more importantly for youths) and new sectors forming and
contributing to GDP and wealth creation
 Actual diversification and broadening of economic base
 Increased population density in rural areas with better infrastructure and service
provision (plus economic growth in those areas)
 Exponential growth will lead to increased generation of tax revenues for GRZ to
invest in better service delivery
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14. The End.
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