Towards the end of last year, Zambia, one of the world’s top exporters of copper, became the first African country to default on a payment since the start of the pandemic. That has sparked fears for other resource-reliant markets in Africa that are struggling to cope with low commodity prices and demand, as well as their escalating debts, writes Maddy White.


When Zambia missed a payment on an overdue US$42.5mn Eurobond coupon for one of its dollar-denominated sovereign bonds at the end of 2020, concerns rippled across the continent that more countries may default on their debt obligations as a result of Covid-19.

On November 13, which marked the end of the payment’s 30-day grace period, Zambia’s ministry of finance revealed in a statement that holders of the country’s US$3bn of Eurobonds had rejected a government request to defer interest payments to April.

The ministry stated that its appeal to delay payment was made in “good faith” and that it remains “committed to finding a consensual and collaborative resolution to debt sustainability issues”.

Zambian officials had warned of a potential default on the country’s debt in October, with the ministry saying that, should it fail to reach an agreement with commercial creditors, “the republic with its limited fiscal space will be unable to make payments and, therefore, fail to forestall accumulating arrears”.

Zambia’s external debt stands at US$11.2bn, according to a 2019 annual economic report by the ministry. The country owes multilateral lenders, including the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), US$2.1bn, an increase of 11% over 2018. Bilateral lenders account for US$3.5bn of the total debt, while commercial debt sits at US$5.6bn.

“Zambia is a classic case of what can go wrong if engagement with the IMF and other multilateral institutions is not there; if those gateways aren’t open,” Thea Fourie, senior economist for Sub-Saharan Africa at IHS Markit, a global information and analytics company, tells GTR. She points to the Republic of the Congo as being in a similar situation in that it has high debts and a mediocre relationship with the IMF.

The default is a concern for countries across Sub-Saharan Africa, particularly markets that rely on the export of hard commodities, such as oil and metals, and which have a high debt burden. Over the last few years, they have faced plunging commodity prices, with the pandemic only serving to aggravate a difficult situation as lockdowns around the world reduced demand and disrupted supply chains.

“Oil-rich markets like Angola and Nigeria have been hit really hard by the drop in global oil prices. Hard commodities such as copper and steel saw supply chain disruptions because of the pandemic,” says Lodewyk Meyer, partner at Baker McKenzie’s banking and finance practice group in Johannesburg. As a result, he says there have been casualties, with traders and financial institutions having to restructure deals.


Delaying debt payments

In many cases, international organisations have sought to ease the debt burden on countries struggling with the effect of the pandemic. The World Bank, IMF and G20, for example, are delaying debt payments through their Debt Service Suspension Initiative (DSSI).

Approved in April last year, the DSSI allows payments from 73 of the poorest countries to be suspended temporarily to ease the financing constraints facing these markets, allowing them to use the liquidity available to mitigate the impact of the Covid-19 crisis.

As of late October, approximately 60% of DSSI eligible countries, many of which are located in Sub-Saharan Africa, had made requests to use the scheme. With the extension of the initiative to June 2021, the IMF has stated that it expects more requests may come.

However, one of Zambia’s biggest creditors is China. As of 2019, the Zambian government owes the China Development Bank (CDB) US$391mn and the Export-Import Bank of China (Cexim) US$2.6bn.

There have been positive developments for both sides. At the end of October, the African nation reached an agreement with CDB to defer the servicing of a commercial loan facility insured by Sinosure, the official Chinese export credit agency. The interest due on the loan was pushed back to April.

As a key creditor to many African nations, China has faced pressure since the start of the pandemic to restructure its loans across the continent to ease liquidity strains. In October, World Bank Group president David Malpass said that Chinese and other private creditors were not fully participating in the debt rescheduling processes, “leaving the debt relief too shallow to meet the fiscal needs of the inequality pandemic around us”.

One African country that is highly indebted to China and faces debt pressures is Angola, where the oil sector accounts for one-third of GDP and more than 90% of exports.

Angola owes more than US$20bn to various Chinese entities, including US$14.5bn to CDB and nearly US$5bn to Cexim, according to Reuters. “A lot of this [Chinese] debt is structured in such a way that it is linked to oil-backed loans. The lower oil prices are really complicating the payback of these debt obligations for Angola,” says IHS Markit’s Fourie.

Chinese officials say they have been doing what they can to help Angola address those difficulties. Foreign ministry spokesperson Wang Wenbin stated at a press conference in September that the “relevant Chinese financial institutions have been in close communication with the Angolan side on relieving debt pressure”.

A report by the IMF confirms that Angola has negotiated debt relief with its major creditors “to ensure medium-term debt sustainability”. The rescheduling of bilateral Chinese debt and the availability of external financing made possible through the IMF mean that Angola’s 2020 and 2021 debt-servicing obligations are likely to be met, finds a December report by Fitch Ratings.

Fourie adds: “I wouldn’t say [Angola] would have necessarily defaulted, but the debt burden rose to unprecedented high levels and therefore it was necessary for it to unlock IMF assistance and reschedule debts.”


Stretching liquidity

Commodity exporters across the continent continue to suffer from low prices and demand, resulting in a lack of available liquidity. At the same time, African SMEs have long struggled to obtain finance to facilitate trade. A September report by the African Development Bank (AfDB) and the African Export-Import Bank (Afreximbank), conducted over 2011-19, found that rejection rates for trade finance applications for SMEs in Africa are rising, with bank participation in activities decreasing. The continent’s trade finance gap, estimated to be more than US$81bn, is also growing.

Baker McKenzie’s Meyer says that with the addition of a pandemic, a “perfect storm” has been created in Africa, adding that the trade and commodity finance landscape is “pretty dire at the moment”.

Multilateral institutions continue to throw lifelines to banks for trade activities. In March last year, Afreximbank announced a US$3bn facility to support member country central banks and other financial institutions to meet trade debt payments due and avert trade payment defaults. It also set out to assist member countries that have fiscal revenues tied to specific export revenues to manage any sudden revenue declines as a result of lower export earnings.

In November, the bank announced a new US$1.5bn pandemic response facility with backing from the International Islamic Trade Finance Corporation and the Arab Bank for Economic Development in Africa to help African countries with the import of medical supplies, as well as agricultural equipment and fertilisers.

Meanwhile, in April, the AfDB announced the creation of a US$10bn Covid-19 response facility that aims to assist member countries in fighting the socio-economic impact of the pandemic.

Despite these financial packages and the DSSI, Meyer says he is “baffled” by the lack of liquidity in the commercial banking sector across Africa and how tough it is to get credit for new ventures or transactions.

Another complication for the commodity finance sector has been the financial and reputational hit following a string of frauds in Asia last year.

Global lenders, including ABN Amro and BNP Paribas, are reducing their exposure to the sector in an attempt to de-risk. In August, ABN Amro announced that it would cease all trade and commodity finance activities following its exposure to fraudulent activity. Meanwhile, BNP Paribas revealed that it will shut its Swiss commodity trade finance business.

For oil traders, the collapse of Singapore’s Hin Leong has had far-reaching effects. The company’s creditors, which included HSBC and ABN Amro, were left facing US$3.5bn in liabilities after the company collapsed in April last year, revealing a backlog of forged documents and fraudulent financing.

Industry experts have since suggested that the scandal is having a knock-on effect on the availability of liquidity for trade and commodity finance around the world – even if companies have no ties to Hin Leong or other firms accused of fraud.

For African companies, that could also have an impact on the cost of funding, says Zhann Meyer, global head of commodity finance at Nedbank.

“The effect is not going to only be the exit of liquidity into the trade and commodity finance market, it’s going to have an impact on pricing as well,” he said at the GTR East Africa 2020 Virtual event in October.

“I think the traders need to be cognisant of this when they enter into lending arrangements. The new normal is quite possibly an environment where the debt is going to be more expensive, and that will have an impact on the cost models.

“Africa is largely seen as a risky environment, and that creates opportunities for us as local African banks. But, also from that perspective, there is going to be an issue in terms of availability of liquidity.”

African businesses that rely on the export of soft and hard commodities will continue to struggle with fluctuating commodity prices and demand, and a lack of available finance. The commodity finance sector’s damaged reputation from recent frauds in Asia may well hamper banks’ support for trade on the continent.

At the same time, public money is likely to continue to be channelled into mitigating the effects of the pandemic and maintaining countries’ financial stability, and not necessarily into projects, including infrastructure, which would improve the prospects for trade in Africa.