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Sub-saharan africa under pressure

3/11/2021

Following Zambia’s sovereign default last year, requests for debt restructuring are multiplying in Sub-Saharan Africa. The Covid shock has brought a significant risk of debt distress in several countries, by exacerbating vulnerabilities that have built up over the past decade. A brief overview of the situation.

TRANSCRIPT // Sub-saharan africa under pressure : March 2021

FOCUS

FRANÇOIS DOUX

Sub-Saharan Africa has been relatively sheltered from the full brunt of the health crisis. Can the same be said from an economic perspective? Perrine Guérin and François Faure are here to tell us more. Hello.

PERRINE GUÉRIN and FRANÇOIS FAURE

Hello.

FRANÇOIS DOUX

Perrine Guérin, has the Covid-19 crisis had a big economic impact on the Sub-Saharan region?

PERRINE GUÉRIN

Yes, the Covid-19 crisis has had a very significant economic impact on the continent, which is expected to report its first recession in 25 years. GDP is expected to contract by more than 3% in 2020. The recovery is also expected to be relatively mild. As a result, the overall wealth in certain countries will not return to pre-crisis levels before 2024 or even 2025. These countries were already struggling with very little fiscal leeway, and the extra spending to manage the crisis and the drop-off in revenues represent major challenges for their governments, whose deficits and debt ratios have soared. As a result, the pandemic has truly hurt the region’s growth prospects.

FRANÇOIS DOUX

François Faure, you are the head of the Country Risk team. What impact will the Covid-19 crisis have on the risk exposure of the Sub-Saharan countries of Africa?

FRANÇOIS FAURE

It is essentially a matter of sovereign risk. As Perrine just pointed out, government debt is the big issue. Average public debt ratios in these countries will exceed the levels of the late 1990s, right before major debt reduction initiatives were launched in these countries.

FRANÇOIS DOUX

Perrine Guérin, what can be done about these debt dynamics? Have any measures been taken?

PERRINE GUÉRIN

Faced with the risk of debt distress, multilateral lenders have responded in a rather unique fashion, not only in terms of speed, but also size, with substantial amounts disbursed through emergency credit lines. At the same time, the Club of Paris creditors have granted a debt servicing moratorium through June 2021 to some thirty African countries. Yet this financial relief is only partial and extremely variable depending on the country. The impact is also temporary: for countries facing a liquidity crisis, these measures help offset the decline in foreign currency inflows and close the gap between funding needs and resources. However, they do not resolve the more fundamental problem of debt solvency. At a time when there is only limited enthusiasm for the emerging markets, several countries may well have to face the prospects of debt restructuring.

FRANÇOIS DOUX

François Faure, tell us more about the situation in 1996 with the debt relief initiatives for the highly indebted poor countries. What are the differences and similarities with the current situation?

FRANÇOIS FAURE

The key similarity is the high level of debt. Debt has reached very high levels in certain countries: even before the outbreak of Covid 19, there was already a sharp rise in the percentage of countries facing solvency problems.

FRANÇOIS DOUX

And the main difference?

FRANÇOIS FAURE

The big difference is the composition of the debt. New creditors have emerged. First, there are holders of international bonds that were largely issued by the emerging countries in recent years. And China, of course, has become a key regional creditor and player in sub-Saharan Africa. China holds at least 20% of the external public debt of these countries.

FRANÇOIS DOUX

My last question, Perrine Guérin. What are the prospects and challenges to come for the Sub-Saharan region?

PERRINE GUÉRIN

Debt will remain a key issue in the years ahead. African countries will need financing to bolster economic recovery, but also to finance sustainable development and growth. They will have to find funding solutions that offer both favourable rates and a sufficiently long maturity so that the return on investment covers the cost of borrowing.

FRANÇOIS DOUX

François Faure, would you like to make a closing remark?

FRANÇOIS FAURE

To conclude, more debt restructurings are anticipated to happen. Certain countries have already requested relief or are getting ready to do so. This is the case for Zambia, Chad and Ethiopia. We hope that for these countries, mutual debt relief efforts will improve compared to the past, and that players like China will participate, and in a more transparent manner than in the past. Other countries have not yet begun debt restructuring because their solvency has yet to be called into question. So far, some countries are still managing to issue debt in the international markets under very favourable conditions, like the Ivory Coast and Benin. Yet these countries must be careful to ensure that the cost of borrowing does not exceed economic growth rates. Unfortunately, one of the consequences of the Covid crisis could be lower potential growth rates.  

FRANÇOIS DOUX

Indeed, we hope to avoid another snowball effect. Thank you François Faure and Perrine Guérin for this update on Sub-Saharan Africa. We will be back in a moment with our Chart of the Month on the economic rebounds in France and Germany, with Louis Boisset.

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