RONAK GOPALDAS: African leaders and private creditors have to tiptoe through a minefield of debt
Urgent intervention is needed to prevent a messy blowout of the continent’s Eurobonds
Financial markets, and in particular emerging-market assets, have been ravaged by the coronavirus pandemic, and African Eurobonds have fallen firmly into the firing line.
A number of the continent’s fragile economies have been hit by the triple whammy of falling commodity prices, rampant currency depreciation and, most critically, a crisis of confidence. This has led to an exodus of capital, driven up their cost of funding and put further pressure on their already strained balance sheets. With yields on African Eurobonds spiking universally, fears of a credit event emanating from the continent are growing.
What’s driving this alarm? In crude terms African sovereigns are staring down the barrel of an unenviable dilemma: either they direct their limited fiscal resources to saving lives or they direct these financial resources to service the interest on their external debt. They simply do not have enough money to do both or, in many instances, either.
Faced with this set of choices, most sane governments will naturally renege on their obligations to external creditors. The alternative is political suicide and potential mass social unrest. However, prioritising domestic considerations also has damaging long-term consequences and will compromise the ability of these countries to access bond markets in future while simultaneously undermining their policy credibility. Yet in these extraordinary circumstances all choices are suboptimal, and the priority is damage limitation over and above anything else.
Nevertheless, it is becoming clear that urgent intervention is needed to prevent a messy blowout. Continued delays run the risk not only of compounding economic disaster but also fomenting a humanitarian one. The outcome will ultimately come down to a game of brinkmanship. The key questions centre on who will blink first, whether the solution will be conciliatory or hostile, and whether it will occur before or after a credit event.
From the perspective of governments there are limited policy options. The first is to unilaterally default, a move that would trigger widespread contagion and exacerbate market chaos. Second, a more orderly debt restructuring would require the buy-in of commercial creditors, but this will not be straightforward. It would entail more lenient payment conditions such as extended maturities and lower interest rates to provide breathing room for economies to recover before resuming their repayments. The fallout from Mozambique’s hidden debt scandal and its ongoing resolution has highlighted that such negotiations are complex, cumbersome and layered with legal tightropes.
The third, increasingly attractive, option is the idea of a debt moratorium — or what former Credit Suisse CEO Tidjane Thiam has termed “a standstill” — on Africa’s external debt. Given the gravity of the situation and the spillover effects on livelihoods in the world’s most impoverished continent, moral suasion has been effectively used to shift public opinion and claim the high ground on the issue.
A number of influential African leaders have come out in support of this approach, while a group of African finance ministers have also requested a waiver on all interest payments on Africa’s debt obligations and immediate cash injections through the World Bank, International Monetary Fund (IMF) and African Development Bank.
Further, SA President Cyril Ramaphosa, as the chair of the AU, has appointed a number of high-ranking officials as special envoys to mobilise international support for the economic challenges African countries will face as a result of the Covid-19 pandemic. Taken together these moves indicate a clear and co-ordinated policy push designed at strengthening the continent’s bargaining position.
The framing of this has been equally shrewd. By positioning this as a humanitarian and moral issue rather than purely an economic issue, the gauntlet has been thrown down to creditors with the tacit implication that they will have “blood on their hands” if they do not play ball.
The reception to this call has been encouraging, with support forthcoming from both multilateral creditors and donor states. The IMF (which has already granted debt relief to 25 countries) is making $50bn available from its emergency financing facilities, while the World Bank has approved a $14bn Covid-19 response package. Further measures from the Group of 20 (G20), which will include debt relief and financial aid, are set to be confirmed at the upcoming virtual IMF spring meetings.
On the bilateral front, China has indicated that it will adopt an accommodative stance towards the $19bn it is owed by African debtors this year. Its decision to partake in a joint debt moratorium for the world’s poorest countries (alongside the Paris Club) is a key milestone.
While these initiatives are certainly directionally positive and will go some way in alleviating the continent’s liquidity and solvency issues, they alone do not fully address the elephant in the room: the issue of debt held by commercial creditors. This group may represent a potential banana skin, given the fact that some 55% of external interest payments is due to private creditors, according to data compiled by the UK-based Debt Campaign.
Many of these investors are now concerned with the issue of moral hazard. Specifically, their worry is that the coronavirus crisis will be used as a get-out-of-jail-free card by misbehaving sovereigns that have not exercised sufficient fiscal discipline and are now opportunistically using the crisis as a means of absolving themselves of responsibility for poor financial management. Zambia (where the yield on the country’s 2022 Eurobond exceeds 65%) was already teetering on the brink of crisis before the Covid-19 outbreak.
Yet these investors cannot be absolved of criticism either. Fuelled by cheap liquidity and low yields in developed markets, they took on outsize risks and received outsize rewards through high yields. Now that the tide has turned and they are on the hook for potentially significant losses, they are crying foul over those very same risks from which they benefited.
For their part, cash-strapped sovereigns may collectively decide to renege on their obligations, particularly if creditors are reticent. Thus, private creditors have to be careful in their approach. If they play hardball, this is unlikely to end well in the court of public opinion, despite being within their legal rights. Similarly, sovereigns need to bear in mind that a kamikaze stance risks unleashing further destructive contagion, closing the taps on a valuable and much needed funding source that will be important down the line.
Reconciling these two positions is the nub of the issue. The situation will only be resolved through urgent, proactive and decisive leadership by all stakeholders concerned. Much will depend on the ability of African sovereigns, multilateral, bilateral and private investors to compromise and co-ordinate a pragmatic solution which distributes the losses in a way that is fair and just.
Any solution that does not achieve this will end up being the equivalent of a bar fight, with suboptimal outcomes for all parties concerned. On a continent where many countries have more MPs than ICU beds, the cost of inaction and dithering will amplify the risks of a humanitarian and economic catastrophe.
• Gopaldas is a director at Signal Risk and a fellow at The Gordon Institute of Business Science.
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