UPDATE 3-Zambia markets surge as Hichilema win boosts debt-resolution hopes

(Updates pricing, adds graphic, quote)

LONDON, Aug 16 (Reuters) - Zambia’s sovereign dollar bonds and currency rallied on Monday as investors were optimistic opposition leader Hakainde Hichilema would bring a swift resolution to the country’s debt woes after a landslide election win.

Hichilema, a businessman, is viewed as more market-friendly than 64-year-old incumbent Edgar Lungu after showing a desire to put Zambia on a more sustainable fiscal footing and engage with investors.

The 2024 and 2027 bonds added more than 8 cents in the dollar to trade at 76.1 cents and 75.1 cents respectively, their highest level since 2019, Tradeweb data showed.

The currency also enjoyed healthy gains, with the kwacha strengthening as much as 1.7%, close to the 11-month peak hit in July. It was last at trade at 19.17 to the dollar,

Creditors have been closely watching the outcome of last Thursday’s vote to gauge the trajectory of debt talks after the major copper producer, which owes more than $12 billion to external creditors, became Africa’s first pandemic-era sovereign default in November.

“This is a really positive outcome for the country,” said Kevin Daly at asset manager abrdn, whose firm is invested in both dollar and local currency sovereign bonds.

“You have to think that an IMF agreement is a done deal now, it is pretty much going to happen, it is just a question of what the timing of a final deal will be,” said Daly, who is part of the creditor committee involved in negotiating the debt restructuring.

Setting the stage for an IMF lending programme to support its recovery, Zambia said in May it had reached a broad agreement with the IMF on macroeconomic and fiscal targets and policy issues.

With Hichilema’s United Party for National Development (UPND) likely to want to renegotiate a more comprehensive IMF deal, a staff-level agreement would probably happen in the first half of 2022 at the earliest, JPMorgan said in a note on Monday. It also recommended buying Zambia’s local currency February 2027 sovereign bond.

“For bondholders, this is positive because more credible and sustainable policies will result in a lower exit yield and therefore a higher recovery value for the bonds,” said Carlos de Sousa, portfolio manager at Vontobel. Ray Jian at Amundi, which also holds Zambia dollar bonds, says he expects any haircut on the debt to be “minimal”.

“The issue in Zambia is not really about growth... it is about mismanagement,” he said. “As long the reform programme and the IMF programme are on track a see a very high recovery value despite the very high debt load.”

Markets will also be watching for how 59-year-old Hichilema engages with China, Zambia’s largest bilateral creditor and one of its largest trading partners.

Zambia owes around $3 billion to Chinese entities and uncertainty surrounds how much breathing room Beijing will offer, given it regularly offers debt reprofiling to troubled borrowers.

“To stop the country from sinking deeper into financial despair, the president-elect will have to use some of that hard-earned political capital to reset relations with China,” wrote Eric Olander, founder of the China Africa Project, which examines relations between Beijing and the continent.

Additional reporting by Joe Bavier; Editing by Bernadette Baum and Alex Richardson