Zambia’s dollar-denominated bonds led losses among emerging peers on Wednesday after the IMF warned that the country’s capacity to service its debt remains weak, dampening bondholders’ hopes for improved terms.

The country’s bonds due in 2053 fell as much as 3 cents on the dollar to 70.6 cents, marking the biggest decline in EM debt on Wednesday. The notes had rallied nearly 50% since April on expectations that an IMF upgrade in Zambia’s debt-carrying capacity would unlock more favourable repayment terms.

However, the latest IMF assessment shows Zambia’s Composite Indicator score — a key measure of debt sustainability — slipped to 2.58 in a staff report, down from 2.62 in October. The decline moves the country further from the 2.69 threshold needed to qualify for an upgrade to medium debt-carrying capacity.

Under Zambia’s sovereign debt restructuring agreements with bilateral and commercial creditors, the government committed to increase repayments if its economic performance improves.

The “bonds are down because the IMF’s latest review downgraded the Composite Indicator while markets expected an upgrade,” said Alexandru Ursu, a portfolio manager and trader at Neuberger Berman Asset Management. “The trigger will be postponed by six months to December 2026 the earliest,” he said.

Like other investors, Morgan Stanley views the setback as temporary. “We now think the bond triggers in December 2026 on base effects, if nothing else. We retain our like stance and our buy 2053 recommendation,” strategists wrote in a note.

The contingency clause in Zambia’s deal with official creditors will be reviewed at the end of 2025, according to the IMF. “If, at this stage, Zambia’s economic performance and policymaking warrant an upgrade to medium debt-carrying capacity, the upside treatment will be triggered — including accelerated principal repayments and higher interest payments to official creditors,” the IMF said.