African countries are facing another debt crisis and will need more long-term help than the latest G20 debt plan offers to curb troubles and keep much-needed investments coming in, according to policy makers, analysts and investors.
About 40 percent of sub-Saharan African countries were in debt distress or at risk of it even before this year, while Zambia became the continent’s first pandemic deficit last Friday.
The United States, China and other G20 countries have offered relief to the world’s poorest countries – many of them in Africa – until at least mid-2021 and have sketched rules for rescheduling government debt to help reduce risk of deficiency due to a coronavirus crisis.
But these plans to provide breathing space in the near term may not go far enough.
“In 2021, a robust liquidity and structural response, recovery and replacement toolbox must be developed in partnership between emerging markets, the private sector and the G20,” warned Vera Songwe, executive secretary of the United Nations Economic Commission for Africa.
Songwe is pushing for measures to unlock $ 500bn to help avoid leaving permanent scars due to long funding gaps in the poorest economies.
Sub-Saharan African countries’ debt ratios had already risen sharply before COVID-19, just over a decade after the International Monetary Fund and World Bank launched the High-Indebted Poor Countries (HIPC) initiative and collapsed debt burdens of around 30 low. -income countries on the continent.
Fast forward to the pandemic and sub-Saharan Africa year it is on track for a record 3 per cent economic slowdown this year, while debt-to-GDP ratios have doubled in the last decade to 57 per cent, ‘ r IMF.
“We’re already in a debt crisis, there’s no question about that,” said Bryan Carter, HSBC’s head of emerging global debt, referring to poor countries around the world.
“I’m worried about 2021. I’m worried about a deal where many countries will once again have to fund themselves in a slow economic environment or a recession even where there is not yet a worldwide vaccine available. For many countries, that’s a year too much to self-fund. ”
Cancellations, suspensions, reduced borrowing costs
Some countries will need help with their debt stock, not just with payments.
Politicians like Ethiopia’s prime minister and Ghana’s finance minister, as well as campaign groups have pressed for total debt cancellation, on top of widespread calls for longer servicing and repayment to the continent’s poorest countries.
Others, such as UNECA and some private investors, have also suggested that the strength of development banks could be leveraged through loans and guarantees to lower borrowing costs for countries under the most pressure.
“Certainly there are some countries, like Zambia and Angola or Ghana, that are in some pretty vulnerable places right now,” said S&P Global Ratings sovereign group managing director Roberto Sifon-Arevalo, adding that the proposed plans were address structural problems. “You need something much more profound and deeper and holistic than this particular approach.”
African countries are in half of the 73 countries eligible for the G20 Debt Service Prevention Initiative (DSSI).
Much has changed since the HIPC initiative when money was owed mainly to rich countries and multilateral institutions. Now, many creditors are making help more complicated.
China plays a key role: its government, banks and companies lent some $ 143bn to Africa between 2000 and 2017, according to Johns Hopkins University.
“About 10 African countries have a debt problem with China,” said Eric Olander, co-founder of The China-Africa Project, adding that Chinese lending is concentrated in a small number of countries. “Djibouti, Ethiopia, Kenya, Angola, Zambia – they all have very serious debt problems.”
One-third of the $ 30.5bn of public debt service payments due in 2021 by DSSI-eligible Sub-Saharan African nations is owed to official Chinese creditors while a further 10 per cent is affiliated with the China Development Bank, the International Finance Institute calculated.
China joining the G20 framework has been widely welcomed, although many have criticized the lack of transparency in borrowing.
“If you look at China, the secrets are mostly covered with secrecy,” said Nalucha Nganga Ziba, Zambia’s country director for the anti-poverty charity ActionAid.
Writing ahead of the G20 leaders’ meeting, the head of the IMF, Kristalina Georgieva, said that the G20 framework, if “fully implemented”, could allow poorer nations to apply for permanent debt relief. He did not give any details. Some G20 members, such as China and Turkey, remain skeptical of real debt write-offs.
Meanwhile, moving payments under the G20 deal from the near to medium term could be pushing the problem down the road.
For example, Scope Ratings calculates that Angola participating in the DSSI could increase its debt servicing requirements between 2022 and 2024 by more than 1 percent of GDP per year.
A blow in Eurobond payments following a debt-selling bonanza that saw Africa’s hard-currency debt markets surpass the $ 100bn mark in 2019 could add to the pressure.
With dollar bond products hovering near double digits, governments like Angola, Ghana and Mozambique would find it difficult to tap markets right now.
Indeed, no government in sub-Saharan Africa has sold Eurobonds since Gabon and Ghana did so in February, before COVID-19 hit.
Nevertheless, access to capital markets will be needed to refinance but also to help fill an external funding gap that the IMF estimates as much as $ 410bn over the next three years.
“The potential battle is going to be between countries that want to grow, with investors saying we need to talk about fiscal consolidation right away,” said Andrew Macfarlane, HM credit strategist at Bank of America.