Zambia's dollar bonds drop over debt indicator worries

By Duncan Miriri

NAIROBI, Aug 6 (Reuters) - Concerns over Zambia's weakening ability to deal with its debt burden pushed the country's international bonds sharply lower on Wednesday, after the International Monetary Fund published its latest assessment of the southern African nation.

Zambia's 2053 dollar-denominated bond XS2837240428=TE lost more than 4 cents in early trading to bid at 68.542 cents on the dollar, hitting a one-month low and falling below the 70 cents threshold below which asset managers consider a country's debt distressed.

By 1048 GMT it had pared some of the losses to trade at 69.466 cents, Tradeweb data showed.

The drop comes in the wake of the IMF executive board approving the fifth review of Zambia's current lending programme late on Tuesday.

As part of the sign-off, the Fund published its latest economic and debt figures, showing Zambia's debt-carrying capacity - or the assessment of a government's ability to handle its debt - remained weak, with the composite indicator used to gauge the level weakening to 2.58, from 2.62 previously.

Zambia - together with Ukraine and Sri Lanka - was one of the countries issuing so-called state contingent debt instruments as part of its restructuring, instruments that are designed to lure investors with a promise of better payouts if certain economic or fiscal targets are achieved.

Disappointment over the key indicator going in the wrong direction weighed on bonds, analysts said.

"A 2.69 cut-off is needed for two semi-annual consecutive reviews for the 2053 bond to become a higher-paying 2035 bond during the 2026-28 observation period," said Samir Gadio, Africa strategist at Standard Chartered, referring to the terms of the bond that was created when Zambia restructured its debt.

Zambia overhauled its bilateral debt in a deal struck last year after it opted to restructure its debt under the G20's Common Framework initiative, a process that also involved combining $3 billion of bonds into two new ones with their own payment schedules and conditions.

The downward revision of the Southern African nation's composite indicator score was mainly caused by a worsening of the import coverage ratio, market participants said, adding that there was still room for it to improve.

"There is still a strong chance that the score will be upgraded in 2026," said Anthony Simond, senior emerging markets debt portfolio manager at Aberdeen.