The risk of sovereign default is growing across Africa because of higher debt levels and currency risk. At the same time, reduced demand and lower commodity prices have pushed some African countries, particularly those reliant on the export of oil and metals, into deep recessions. This financial pressure is also increased by lower financial inflows, as investors postpone their spending and official development aid is limited.
Countries in Sub-Saharan Africa (SSA) have been hurt economically by the Covid-19 pandemic, with a regional GDP contraction of 3.3% expected this year, according to data from the International Monetary Fund (IMF). In 2019, SSA’s GDP grew by 2.9%, with countries in the region some of the fastest growing in the world in recent years.
SSA now faces its first recession in 25 years, with the most adversely impacted countries those that are politically unstable, and those which are dependent on the export of commodities such as oil and metals, as well as the tourism sector.
“Metal exporters such as South Africa, Botswana and Zambia have seen a sharp decline in export revenues. However, the shock is hardest felt in the oil exporting countries such as the Republic of the Congo and Angola, where oil accounts for more than 90% of the exporting revenues,” reads an October report titled Covid-19 aggravates Sub-Saharan African Debt Problems, by Dutch export credit agency (ECA) Atradius.
In addition, many SSA countries face a drop in financial inflows – remittances, foreign direct investments (FDI), official development aid (ODA) and portfolio investments. This will only aggravate vulnerabilities, finds the report.
FDI is expected to be lower because investors are postponing their spending or divesting amid the pandemic. The report says that investments in the oil and mining sector will likely be lower this year due to decreased commodity prices. At the same time, it is uncertain what the Covid-19 impact will be on ODA, which could be constrained as developed economies combat the crisis at home.
Increased public spending to contain the virus and provide financial support to households and businesses in the form of cash transfers, unemployment benefits, tax cuts and deferrals has pushed up fiscal deficits, meaning that public debt is rising, and this raises concerns about African countries’ debt sustainability. “Even before the Covid-19 crisis, the elevated debt levels of some countries were worrisome. Furthermore, the changing debt structure is making the situation riskier,” the report states.
The composition of debt in SSA has changed, moving away from multilateral financial institutions and official bilateral creditors and towards more commercial and foreign currency denominated debt. In addition to the increase of commercial debt, other bilateral creditors outside of the Paris Club have replaced traditional lenders.
Risky debt and defaults
This risky debt could lead to some African countries defaulting. Robert Besseling, executive director at EXX Africa, a specialist intelligence company, said during the GTR Africa 2020 Virtual event on October 19 that in terms of sovereign defaults, “Republic of the Congo and Zambia are very high up on our radar, and so is Chad.”
Thea Fourie, senior economist, Sub-Saharan Africa, economics and country risk at IHS Markit, added during the same session that Zambia is on “the verge of default”.
When it comes to the larger economies in Africa, Besseling points to Kenya as most likely to default in 2021. He says: “That’s mostly because of the Chinese railway debt that has developed over the past few years, and which was unaffordable even pre-pandemic. So, a restructuring was on the cards anyway.”
Kenya borrowed more than US$3bn from China to build the Standard Gauge Railway (SGR) railway from Mombasa to Nairobi, which began operating in 2017.
Last month, Kenya’s transport department urged a renegotiation of the deal amid the pandemic. In a report sent to parliament, the department states that the government should “initiate the process of renegotiating the loan terms of the SGR with the lender due to the prevailing economic distress occasioned by the global pandemic”. It also pressed for the renegotiation of the contract for the operation of the line. China Road and Bridge Corporation (CRBC), which constructed it, owns that contract through its subsidiary Africa Star Operations.
Through the Belt and Road Initiative (BRI), launched in 2013, Chinese entities have been funnelling trillions of dollars into infrastructure and energy projects across more than 125 countries. China has been criticised by government officials and analysts across the globe for its lack of transparency over the projects it finances under the BRI. They claim that it has led to developing countries owing China debts that they cannot repay.
During his session, Besseling stressed that any sovereign defaults in Africa will depend on whether the Debt Service Suspension Initiative (DSSI) is renewed, expanded and extended, and whether commercial creditors and Chinese creditors “jump on board as well”.
The DSSI, which was approved by the G20 in April, allows a temporary suspension of official sector debt payments to the poorest countries. It will run until at least June 2021, and of the 73 countries eligible for the suspension of debt, just over 40 have signed up for it, the majority of which are in SSA.
More recently, in October, World Bank Group president David Malpass said that Chinese and other private creditors are 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”.
EXX Africa’s Besseling explained that China is unlikely to fully commit to the DSSI as it is yet to be transparent over the deals it makes. Instead, China will likely try to restructure deals before a default occurs, with Chinese creditors seeking government support to tap into resources or key infrastructure as part of the restructuring. “We’ve seen that already happen in Zambia, and a number of other African countries as well, where key infrastructure becomes part of the collateral, so to speak, of the loan.”
In October, foreign ministry spokesperson Zhao Lijian said in a statement that the Export-Import Bank of China (Cexim) had signed debt suspension agreements with 11 African countries. China will also waive interest-free loans due to mature by the end of 2020 for 15 African countries – although it is not clear which nations stand to benefit.
“As for the false accusations made by some countries and media against China, I would like to point out that if we break down African countries’ foreign debt, multilateral financial institutions and commercial creditors hold more than three-quarters of the total, and so bear a greater responsibility for debt relief,” the minister added.