Africa: debt restructuring wave to sweep the region - Capital Economics
Africa Economics

Africa: debt restructuring wave to sweep the region

Africa Economics Update
Written by Virag Forizs

The coronavirus and low commodity prices are putting pressure on most African economies’ balance of payments positions and pushing many sovereigns closer to default. Besides Zambia, which is already moving towards debt restructuring, the risks are highest in Ethiopia, Angola and Ghana.

  • The coronavirus and low commodity prices are putting pressure on most African economies’ balance of payments positions and pushing many sovereigns closer to default. Besides Zambia, which is already moving towards debt restructuring, the risks are highest in Ethiopia, Angola and Ghana.
  • External positions across Africa are under severe strain. Global measures to contain the coronavirus, combined with the Saudi-Russia war for oil market share, have caused commodity prices to tank, resulting in lower export revenues for major producers like Nigeria, Angola, and Zambia. Foreign capital inflows into emerging markets have essentially dried up, exacerbating balance of payment strains.
  • Plugging the financing gap is becoming increasingly difficult. Market-determined borrowing costs are prohibitively high. In much of Africa, sovereign dollar bonds are trading close to or in distressed territory. (See Chart 1.) And African central banks have limited foreign exchange reserves to repay foreign creditors.
  • One way of showing this is to compare a country’s reserves with its gross external financing requirement – the foreign capital flows needed to roll over maturing external debt and to finance the current account deficit over the coming 12 months. Mozambique, Ethiopia and Zambia all fare poorly on this measure. But most countries have weak balance sheets compared with other emerging markets. (See Chart 2.)
  • There are several ways to relieve pressure on strained balance of payments positions. One is to cut domestic demand dramatically through fiscal tightening in order to reduce imports, tipping current account positions into surplus. This would generate the foreign currency needed to make external debt repayments.
  • But tightening the fiscal belt during a time when governments need to increase spending on healthcare and cushioning the economic blow from the pandemic, is likely to be unpalatable. Due to lack of alternative options, some countries might be tempted to default on their external debts (which in almost all cases were issued by the public sector). That would provide more resources for officials to spend on healthcare and other coronavirus-related costs.
  • Or, as seems to be happening widely, governments can secure non-market financing from international organisations. Reports suggest that 20 African countries, including Ghana and Kenya, have already approached the IMF. But even if governments can get the IMF on board, the Fund may demand debt restructuring (either via haircuts or re-profiling).
  • The IMF is, after all, precluded from lending to countries whose public debt positions it deems unsustainable. Recent IMF debt sustainability analyses suggest that Ethiopia, Angola and Ghana might not meet that lending criteria. While Mozambique stands out worryingly on Chart 2, this partly stems from large gas projects bloating the current account deficit. Risks are mitigated by last year’s debt swap.
  • Finally, South Africa’s situation is different from elsewhere in the region; despite its slowly-worsening debt position, it does not face the risk of a near-term default. The country is in a unique position in the region of having a large financial sector and the ability to borrow domestically (in local currency) to finance its large budget deficit. This limits imminent sovereign debt crisis risks. That said, the demands on the government’s purse resulting from the coronavirus will add to the already worrying debt trajectory.

Chart 1: EMBI Bond Spreads Over Treasuries
(Basis Points)

Chart 2: Gross External Financing Requirement
(% of Foreign Exchange Reserves, Latest)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Virág Fórizs, Emerging Markets Economist, virag.forizs@capitaleconomics.com