Rating agencies could solve Africa’s debt impasse

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Institutional investors and global lenders are stubborn as the COVID-19 pandemic tightens its grip on Africa. An April call by the Group of Twenty (G20) for private sector abstention, in the form of a temporary halt to interest payments, was ignored. One possible solution would be for the three global credit rating agencies to provide the analytical muscle that could help break this impasse.

Fitch Ratings, Moody’s Investors Service and Standard & Poor’s Financial Services have been doing business during the pandemic doing what they always do: providing rating assessments and credit warnings to corporate and sovereign borrowers. The pandemic has forced global policymakers to introduce unconventional measures to address economic and public health damage. But on the central question of how African governments should respond to this unprecedented humanitarian crisis, the private sector is pursuing a rigid approach. The situation must change.

The facts are well known, but bear repeating. As the virus first spread across the globe, G20 leaders agreed to a debt freeze for seventy-three low-income countries, many of them in Africa. By the end of July, forty-one countries had requested relief that would release about $12 billion in debt service this year. In July, the G20 reiterated its call on international banks and investors to show leniency on the estimated $45 billion in private sector external debt payments owed by African sovereigns this year.

Over the past two months, the pandemic has gained momentum across Africa. Testing in many countries is limited, but more than 1.2 million cases have been reported, including more than 600,000 in South Africa alone. Beyond the immediate toll, the diversion of scarce resources from other crucial programs, particularly the treatment and prevention of AIDS, tuberculosis and malaria, increases the human toll of the crisis. In a recent report, the World Food Program estimated that “the number of acutely food insecure people in East Africa could increase by 73%” to reach 41.5 million by the end of 2020..

Rating agencies have assiduously monitored the financial impact of the crisis. In its August 13 Credit Outlook report (available only to paying customers), Moody’s estimated that even after official G20 debt relief, eligible countries would face “an exceptional shortfall of around $40 billion of dollars” until the end of the year and assigned “negative outlook to a number of sovereigns[,] highlighting the challenge they face, regardless of the [G20] initiative.”

Moody’s downgraded Ethiopia for “its stated intention to seek public sector debt service relief” under the G20 initiative and downgraded Cameroon, Ivory Coast and Senegal. “examination for downgrading”. In its August 13 report, Moody’s says some governments continued to pay their private creditors even after getting official help, and “[a]Consequently, the risk of [private sector involvement] in all or most cases appears to have decreased. Some of the 32 countries that opted out of the initiative have privately indicated they are concerned about the threat of a ratings downgrade.

Fitch warned days after the announcement of the G20 initiative that the “preferred creditor status” of development banks like the World Bank could suffer if developing countries suspended debt payments. This led the G20, in its July communiqué, to call on these institutions to protect their current ratings even as they “go further” in their support for debt relief.

Public pressure on lenders and bondholders to join the G20 effort, including from UN agencies, is not working. Major banks lending to Africa have called for case-by-case negotiations. And in an April statement, bondholders voiced their opposition to a “rushed and comprehensive approach” to debt relief, saying “future generations of Africans will need access to capital.” to invest in hospitals, roads, education, health systems and other critical infrastructure”. for economic and social development.

Many bondholders don’t seem to understand that the pandemic is very different from a financial crisis whose origins are rooted in market failures. The African exposures of institutional investors and global banks represent only a small part of their portfolios. There is little risk of a wave of sovereign defaults simply because of the G20’s temporary halt.

Over the past decade, most African governments have proven to be reliable partners in global finance, rewarding investors with yields significantly higher than those available from treasuries or gilts. Instead of lecturing countries about preserving the sanctity of the “culture of credit,” perhaps it is time to discuss burden sharing. There are many precedents for this, as evidenced by the recent bondholder debt relief agreement with Argentina.

It is therefore time for the rating agencies, which have considerable leverage to influence the private sector, to play a more active role in the search for a sensible solution. What can be done?

Perhaps there should be a joint public-private deal for a suspension of payments on African sovereign debt, with a firm commitment by governments to repay what is owed to the private sector after the International Monetary Fund (IMF) lifts the green flag that economic conditions have improved. Rating agencies could provide independent economic assessments, as they always do, but more importantly they should suspend rating judgments while the status quo is in effect. Global cooperation during the pandemic will require finding such innovative and original solutions.

Moreover, what is needed after the pandemic is an independent review of Eurobonds and other contracts signed by African governments. These contracts are heavily skewed in favor of creditors, with no flexibility to deal with emergencies like a pandemic. Over the past two decades, creditors have introduced collective action clauses into sovereign bond contracts to facilitate the orderly resolution of debt crises. We need to consider a clause in bonds issued by low-income countries to suspend interest payments under extraordinary conditions, with the tacit support of rating agencies.

It all comes down to the need for global leadership and cooperation. Signals from international agencies like the IMF are that the economic slowdown in developing countries is likely to lead to long-term scars. This means that the debt crisis will not simply “go away”, as some leaders have predicted for the virus itself.

Credit rating agencies should offer a nuanced understanding of the unique needs of African nations. The G20 and global regulators have the power to persuade international investors that a little forbearance could save lives and livelihoods. But this requires more political will than they have shown so far.

Vasuki Shastry, formerly at the IMF and Standard Chartered Bank, is a Chatham House Fellow and author of “Resurgent Indonesia – From Crisis to Confidence”.

Jeremy Mark was Senior Communications Advisor and Speechwriter to the IMF’s Executive Team and previously an award-winning reporter for the Asian Wall Street Journal.

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Image: A Moody’s sign on Tower 7 of the World Trade Center is pictured in New York August 2, 2011. REUTERS/Mike Segar

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