Proposals on how to redirect IMF international reserve assets from developed countries to emerging markets are failing to make headway. The prospect of blanket debt relief in Africa remains remote, while deferred interest on bilateral and concessional loans will become due from next year. Few countries will be able to make such bullet payments on time. Nevertheless, some debt distressed countries are benefitting from case-by-case relief measures and settling of long-held arrears.
On 17 and 18 May, France hosted a summit that brought together 21 African leaders, as well as the heads of the International Monetary Fund (IMF), the African Development Bank (AfDB), and the European Union (EU). The real achievement of the gathering was reached beforehand as France agreed to cancel its debt to Sudan and committed to new investment pledges (see SUDAN: PROGRESS TOWARDS DEBT RELIEF AND ACCESS TO INTERNATIONAL FINANCING). However, the main Africa financing meeting did not reach its stated objective of launching a “New Deal” on the continent’s debt. Instead, the host, French President Emmanuel Macron, said the summit had reached a “new dynamic” toward “flexibility on debt and deficit ceilings.”
Therefore, the Group of 20’s Debt Service Suspension Initiative (DSSI) will remain the primary tool for debt relief for emerging markets, while developed economies have reached no consensus on how to “redirect” new issuance of the IMF’s reserve currency, Special Drawing Rights (SDR), to Africa’s central banks. The French government had hoped that EU, US, and other western leaders would have agreed to channel USD 100 billion worth of SDRs to Africa by late October. However, there is no agreement on the amount of SDRs to be deployed, nor any accord on how to redirect these funds, specifically there is a dispute on whether to send money directly to central banks, to buy out holders of African bonds, or to finance vaccination purchases.
PANGEA-RISK outlines the trajectory of debt relief plans for the remainder of this year and forecasts some key trends in several debt-distressed markets.
Development finance initiatives
As the world slowly emerges from the pandemic, the focus is now shifting toward first vaccination rollouts, then economic recovery, and finally rebuilding of countries, including those in Africa. The continent will emerge from its first annual recession in over a quarter century but will grow at a slower pace than any other continent this year. Developing countries have struggled to support their budgets, service their debt, fund coronavirus relief policies, purchase vaccines, and drive infrastructure expansion to boost much-needed growth and employment to recover from the pandemic. The world’s richest economies have spent as much as 20 percent of national income on COVID-19 fiscal and monetary stimulus responses, while the poorest economies have managed only 2 percent at most. To make up this shortfall, development finance and impact investment is playing an increasingly important role.
At the forefront, have been the IMF and World Bank. The IMF has so far approved almost USD 19.5 billion in disaster relief to sub-Saharan Africa alone. The World Bank has made available nearly USD 25 billion to respond to the COVID-19 crisis in Africa, which is only half of the USD 50 billion it intends to deploy on the continent. The two Bretton Woods institutions also played a paramount role in persuading the G20 club of wealthy nations to create the Debt Service Suspension Initiative (DSSI). In April, the G-20 agreed to extend the DSSI until the end of 2021, although this will be the final extension. If all eligible countries participate in the DSSI, it could create almost USD 10.5 billion in savings in Africa and the Middle East until the end of this year. Yet, the DSSI is unlikely to reach full capacity as some African countries prefer to avoid the scheme that mandates how savings from debt service relief should be spent. Indeed, international efforts to alleviate Africa’s debt burden have remained uncoordinated, contradictory, and often uncommitted.
The G20 has urged private creditors to match their proposal to allow the poorest nations to suspend debt payments for the rest of the year. However, private creditors, like those united in the Africa Private Creditor Working Group (AfricaPCWG), which includes large asset managers holding African debt, have warned that a one-size-fits-all solution would be counterproductive. Some 32 percent of total external debt and 55 percent of external debt service payments are estimated to be commercial. AfricaPCWG has refused to join the DSSI scheme and is negotiating debt relief individually with specific countries. Even though China has now joined the G20 initiative, it also negotiates debt restructuring on a bilateral basis, rather than using the G20 forum. The AU proposal to convert some of Africa’s debt into longer-term instruments in order to head off any risk of default has also failed to gain traction. The Common Framework on African debt relief has attracted little interest except from distressed markets with little or no Eurobond exposure. The Framework is available to 73 countries, but only Chad, Ethiopia, and Zambia have so far requested it. Fearing automatic credit rating downgrades, Eurobond issuers have held off from applying to the Common Framework.
Africa’s total debt pile now amounts to USD 700 billion, of which more than half is owed to the private sector. Seven African economies now have public debt that is larger than the size of their economy. Africa’s debt burden is expected to be 10 to 15 percent higher after the pandemic. Even another round of IMF emergency financing and G20 debt relief may not avoid further defaults. After accurately forecasting debt defaults in Mozambique and Zambia over the past few years, PANGEA-RISK has now raised particular concern over Angola and Republic of Congo, whose oil-dependent economies may not be able to withstand the economic impact of the pandemic. Africa alone will need USD 100 billion for its continental vaccination programme and much more needs to be done to fill the development financing gap. To drive a more sustained and broad-based economic recovery on the continent, USD 450 billion is required over the next three years.
The G20 club of wealthy nations is close to backing a new allocation of the IMF’s Special Drawing Rights (SDR), potentially worth USD 650 billion. As a result, some larger emerging markets such as South Africa, Nigeria, and Turkey could see a boost of up to 20 percent to their foreign exchange reserves, which would help them to manage their debt payments, stabilise currencies, and support budget deficits. SDRs are an international reserve asset which can be held by central banks without stoking inflation, demanding onerous interest payments, or increasing public debt burdens. The IMF’s issuance will increase liquidity, helping to stabilise the public finances and enable some governments to pay off costly loans, thus improving Africa’s debt outlook.
As a next step, the bulk of these SDRs due to wealthy countries – some USD 400 billion – would then be “redirected” to smaller and poorer countries, particularly in Africa. The world’s poorest continent alone requires some USD 450 billion over the next three years to emerge from the pandemic. The proposal would effectively globalise the new US administration’s strategy to spend and borrow a way out of the pandemic. On the one hand, these funds could help poorer countries manage their debt payments, stabilise currencies, support budget deficits, and finance vaccine purchases.
However, the proposal to directly lend SDRs to African central banks is raising valid concerns that emerging markets may become overheated, thus stoking inflation. Nigeria’s inflation rate is already at a more than four-year high. Although SDRs would be lend at concessional (or perhaps zero) rates, the proposal would add billions to Africa’s sizable debt burden. The continent’s debt is already expected to be 10 to 15 percent higher after the pandemic. Another concern is that countries with bloated public sectors, mismanaged economies, and weak state institutions would squander the money if SDRs are lend directly to central banks, while corrupt elites would see a fresh opportunity for embezzlement.
For many commentators, the solution to this quandary is evident – firstly, some of the SDR allocations should be directed at the COVAX initiative to fund purchases of vaccines for poorer countries. Africa alone will need USD 100 billion for its continental vaccination programme. Secondly, the money should be channelled through development finance institutions, which have spearheaded the battle against the pandemic since early last year. Such a structure would also open an opportunity to involve the private sector to support development finance and impact investment initiatives, particularly focussed on infrastructure and renewable energy that would accelerate growth, boost employment, and diversify economies.
SDRs to buy back bonds
Another option is to deploy SDRs to buy out holders of African bonds. The AfDB President Akinwumi Adesina has proposed that African sovereigns will struggle to make bullet payments on loans when these become due. However, France has opposed a blanket approach to such debt forgiveness and instead proposed using SDRs to settle arrears by some countries, like Sudan. Adesina has argued that the Common Framework has failed in offering debt relief as most distressed African countries have refused to apply for the initiative fearing credit rating downgrades, while some applications are taking too long to approve. For example, credit rating agencies have moved Ethiopia’s outlook to negative due to delays on its Common Framework application.
Sudan makes progress on debt relief
On 17 May, the International Monetary Fund (IMF) executive board approved a financing plan to cover its share of debt relief to Sudan. The amount of the financing was not disclosed. France, Germany, and Norway were among the countries also signalling their readiness to forgo repayment at a mid-May conference in Paris that showcased Sudan’s return to the international financial community. Removing IMF arrears, facilitated by a USD 1.5 billion bridge loan from France, clears the way for Sudan to get relief from global creditors under the Highly Indebted Poor Countries initiative (HIPC).
Sudan has developed and implemented a strategy to clear its arrears, leading the government to request a 12-month IMF staff-monitored program (SMP) as a means for eventually seeking debt relief from Paris Club creditors under the HIPC initiative. Sudan’s removal from the SSTL accelerated the country’s eligibility for HIPC initiative relief, and the latest discussions with the IMF and creditors in Paris have made substantial progress towards debt relief. The UK, Ireland, and Sweden have made similar bridging loans to repay Sudan’s arrears to the AfDB, and the US has provided a bridging loan to pay off arrears to the World Bank.
France has stated that it was “in favour of cancelling debt close to USD 5 billion.” Norway announced the cancellation of its bilateral debt in a statement, while Germany’s foreign minister tweeted that Berlin would waive debts of USD 440 million. Sudanese state TV reported that Saudi Arabia had “affirmed its readiness” to forgo USD 4.5 billion in debts, without giving more details. A group of creditors representing about half of Sudan’s commercial debt announced they will give its “fair share of debt relief” under the HIPC program – as long as other creditors do the same. Under HIPC most investors will forgive 85 percent-plus of all debt due to them, including London Club. While HIPC may take until 2024, creditors could quickly lift a large part of the burden by forgiving most of Sudan’s arrears after a “decision point” expected in June 2021 to kick off the HIPC process. However, after that decision point, Sudan will have to start making debt service payments (see SUDAN: PROGRESS TOWARDS DEBT RELIEF AND ACCESS TO INTERNATIONAL FINANCING).
While there are perceptions of heightened risk in African credit markets, investors that made a careful assessment of fundamentals, such as governments’ commitments to prudent borrowing and economic diversity, outperformed despite the Covid-19 crisis. The severity of Covid-19’s economic effect has varied between countries in Africa, reminding investors about the wide spectrum of risk in African sovereign debt and the importance of being selective in portfolio construction.
The African debt universe comprises instruments from various frontier markets, with the exception of South Africa and Egypt. A key differentiator of risk is a country’s level of resource dependence. The IMF classifies African countries as oil exporters (Angola, Nigeria and Gabon); other resource-intensive countries (Zambia, Ghana and Tanzania); and non-resource-intensive countries (Kenya, Ivory Coast and Ethiopia). Other differences are population size (Nigeria’s 200 million people versus Namibia’s 2 million), exchange rate regimes (Ghana’s floating currency versus Morocco’s stabilised dirham), geographical location, level of indebtedness, income per capita, and various others, which result in divergent economic outcomes.
The main confusion and points of contention have arisen over debt relief proposals. The African Union (AU) and African finance ministers are still seeking blanket debt relief to plug the continent’s financing shortfall. The much-trumpeted Debt Service Suspension Initiative (DSSI) has done no more than deferred interest payments to beyond 2021. The AU wants these deferments to be expanded and extended beyond 2021. However, the G20 is unlikely to consider these proposals. Meanwhile, many African countries have also refused to sign up to the DSSI as the terms are too stringent and restrictive of future debt relief possibilities. Moreover, DSSI participation is being perceived as a default by major credit rating agencies, some of which have consistently downgraded any country that has committed to the DSSI.
Also, the common framework for debt relief is still being shunned by most debt distressed countries, with the notable exceptions of Ethiopia, Zambia, and Chad. Countries that have issued Eurobonds are reluctant to apply to the framework, fearing that doing so will impact their sovereign ratings. Instead, distressed emerging markets will seek to issue more bonds on international debt markets to fund their budgets and repay existing loans. Ghana, Kenya, Ivory Coast, and others will issue more Eurobonds in coming months, despite growing concerns over repayment affordability.