Some African leaders are nervous about taking up the debt relief recently offered by international lenders in the G20 group of countries to help poorer nations cope with the economic and fiscal devastation caused by the coronavirus crisis.
Even discussing relief could downgrade international credit ratings and trigger bond repayment clauses on the Eurobonds that African governments have been issuing at an increasing rate.
The G20 had hoped to free up $20bn for developing countries to use to support their health systems, as the health crisis continues to gain momentum in many of them.
They offered 73 countries globally a suspension of bilateral debt-service payments for the rest of 2020, if requested.
Despite emergency lending from the IMF and the World Bank, there is a financing deficit of $44bn. But African governments are not requesting the relief.
For example, in Kenya the Treasury worries that the terms of its Eurobonds indicate that if it asks for a freeze on $675m of current bilateral loan repayments, this would be seen as a “default” and trigger demands for the country to repay $6.1bn of Eurobonds.
According to a clause in Kenya’s Eurobond prospectus, Kenya would be considered in “default” if it fails to pay debt of more than $25m or gets a moratorium on foreign loans, or if it fails to pay principal within 15 days of due date or interest for 30 days.
Total African debt to bond holders is put at $115bn and many African nations have been issuing Eurobonds at interest rates some 7% higher than those of less risky countries.
In secondary trading in recent weeks bond yields for some countries have been climbing sharply as investors see soaring risks.
Coronavirus only swells existing risk. The International Monetary Fund (IMF) warned two years ago that many countries could be considered “debt distressed”.
Requesting to use the debt moratorium could also damage the international credit ratings that are at the core of the international borrowing. These have been under threat as governments’ deficits soar due to increased spending to cope with the impact of the pandemic, lower tax revenues received from less business activity and lower profits and payrolls.
Amadou Hott, Senegal’s Minister of Economy, Planning and International Cooperation, told The Economist: “We need to make sure we are protecting our hard-earned access to international capital markets. The best way of doing it is, at any cost, to protect our commitments with private creditors.” He says many African governments feel the same.
No choice for some
Rating agency Moody’s downgraded Kenya’s outlook to “negative” from “stable” on 7 May, blaming the impact of the health crisis and reduced farm exports. It has warned it may downgrade Cameroon and Ethiopia because they accepted debt relief.
Some countries have no choice. In late May it was reported that Zambia may become the first sovereign default casualty of Covid-19.
It has hired investment bankers Lazard on a $5m contract to advise on “liability management” or restructuring $11bn of debt, including an estimated $3bn to US bond holders and a similar amount to China. Lazard also advises Argentina, which defaulted in May.
Zambia faces $1.5bn of debt repayments in 2020 and Fitch Ratings cut Zambia to “double C” in April, warning that default was “probable”.
Angola is one of many African oil exporters whose economies, including exports and tax revenues, crashed when the world price of oil fell below $20 a barrel. It is supposed to repay $500m to private bondholders this year and an unknown sum to China.
To mitigate the crisis, an industry group called Institute for International Finance has proposed that bondholders would offer a payment delay in return for borrowers offering higher interest, although the same concerns may stop investors asking for this.
An alternative would be a massive fund to help African governments. At the end of March, African Ministers of Finance hosted by Vera Songwe, Executive Secretary of UNECA, met virtually and called for the creation of a $100bn special purpose vehicle to deal with all sovereign debt obligations. It is not clear who has the spare funds to invest in this.
African borrowers face a giant wall of repayments over the next five years and whatever happens, some defaults are likely. But in the short-term, they face agonising choices between spending on healthcare and trying to preserve livelihoods for their citizens or maintaining their access to international markets for the future.