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Credit FAQ: COVID-19 And Implications Of Temporary Debt Moratoriums For Rated African Sovereigns

The COVID-19 pandemic is further exacerbating the macroeconomic and social vulnerabilities of low-income African countries. Several of these countries have responded by implementing a range of policy measures and have requested assistance and forbearance from international financial institutions, bilateral national lenders, as well as in some instances the private sector.

On March 22, the UN Economic Commission for Africa, along with the majority of African finance ministers, formally requested about US$100 billion in financial support from bilateral lender countries and multilateral financial institutions to help support African economies badly affected by COVID-19. Following the request, on March 25, the IMF and the World Bank, in a joint communique to the G20, called for official creditors to allow low-income countries to suspend their debt-service payments. The low-income countries in question are those current on their debt service to the IMF and World Bank and either eligible for financing from the International Development Association or belonging to the UN's group of least developed countries.

The debt-service payment suspension agreed by the G20 is slated to start on May 1 and conclude on Dec. 31, 2020, but could be extended through 2021 after analysis of the low income countries' liquidity needs. The planned suspension includes all interest and principal payments due to official bilateral creditors. The G20 is calling on private (nonofficial) creditors to participate in the initiative on comparable terms.

Frequently Asked Questions

How does S&P Global Ratings treat debt relief from official sources for sovereigns in its ratings?

In its sovereign rating methodology, S&P Global Ratings distinguishes between two different types of sovereign debt:

  • Official (debt contracted under noncommercial terms owed to other governments, public sector enterprises, or supranational institutions); and
  • Commercial (debt that is held by private sector creditors).

Our sovereign ratings reflect a sovereign's willingness and ability to repay its "commercial" debt on time and in full. The main reason for this is that, based on historical precedent, we generally expect official lenders, would, as a policy matter grant concessional treatment to distressed sovereigns to assist them in recovering from economic distress. We believe our sovereign ratings are most meaningful if we exclude missed government-to-government debt-service payments as a default event, because it would otherwise understate the likelihood of payment to commercial creditors. Therefore, a temporary debt repayment moratorium on official debt, such as that planned by the G20, would not normally constitute a default under our criteria (see "Sovereign Rating Methodology," published Dec. 18, 2017, on RatingsDirect).

For example, we did not assess the bilateral debt renegotiation that occurred between government-owned policy banks, led by the Chinese government, and several African countries, including Angola, Ethiopia, and Congo-Brazzaville, among others, as a default because we characterized such debts as "official" under our sovereign criteria.

Similarly, we do not consider the IMF's recent announcement of temporary interest payment suspension (debt-service relief) on its loans to 25 low-income countries as defaults by those countries, because we also qualify such multilateral loans as "official" debt under our criteria.

In the same vein, the G20's announcement to temporarily suspend low-income countries' debt repayments to bilateral nation creditors would not lead to us classify the suspensions as sovereign defaults, given that we characterize these loans under our criteria as "official" debt.

How does S&P Global Ratings treat debt-restructuring from private creditors?

Distinct from our view of nonpayment of official debt, and depending on several considerations, including a lack of adequate offsetting compensation and questionable capacity of the sovereign to repay its financial obligations in the absence of the debt-relief measures, we could view debt-restructuring or changes to the terms of commercial debt obligations held by private investors as a default under our criteria (see "Rating Implications Of Exchange Offers And Similar Restructurings, Update," May 12, 2009). Therefore, we will have to assess the specific characteristics of the restructuring on a case-by-case basis to draw our conclusions.

As an example, in April 2016 we lowered our rating on Mozambique to 'SD' when the government exchanged loan participation notes issued by special-purpose entity Mozambique EMATUM Finance 2020 B.V. against new U.S. dollar-denominated fixed-rate notes issued by the Mozambique government. In line with our criteria, we considered the transaction-changing terms on the government-guaranteed obligation as a restructuring of a commercial debt obligation (see "Republic of Mozambique Foreign Currency Sovereign Ratings Lowered To 'SD/D' On Announced Debt Exchange Offer Results," April 1, 2016).

Payment delays on commercial debt can also lead to default after consideration of the stated or imputed grace period. In August 2016, for example, Congo-Brazzaville missed interest and principal payments when the stated grace period expired, leading us to lower the ratings to 'SD/D' (see "Republic of Congo Foreign Currency Ratings Lowered To 'SD/D' After Missed Payment On U.S. Dollar Notes," Aug. 2, 2016). The following year, Congo-Brazzaville could not effect a semiannual bond payment before the end of the grace period because of legal administrative issues, leading to another downgrade to 'SD/D' (see "Republic Of Congo Foreign Currency Ratings Lowered To 'SD/D' After Trustee Unable To Unfreeze Bond Payments," Aug. 1, 2017.

Although the G20's communique requests that private creditors participate in its initiative on comparable terms, we would expect that a suspension of debt-service payments to private creditors would represent a credit negative, which in some cases could constitute a sovereign default under our criteria. However, we would assess the relevant issues and characteristics on a case-by-case basis.

Will the multilateral lending institutions (MLIs) also extend debt relief? How could this relief affect the ratings on MLIs?

We expect MLIs will continue lending and support to the poorest sovereigns in accordance with their public policy mandates by extending new financing, reallocating resources, and providing technical assistance to respond to COVID-19 shocks. The African Development Bank, one of many MLIs offering COVID-19 aid packages, recently established a US$10 billion facility to help African countries, although it is still considering the logistics and criteria for disbursement.

The G20 communique also calls on MLIs "to further explore the options for the suspension of debt-service payments over the suspension period, while maintaining their current rating and low cost of funding." While this raises the possibility that large scale payment suspensions by debtor sovereigns to MLIs may effectively jeopardize MLIs' status as preferred creditors, we nevertheless anticipate any options to suspend debt service will include measures compensating MLIs for their losses and preserve their status because:

  • We believe MLIs' business models mostly rest on the preferred creditor treatment that means sovereigns should repay debt owed to MLIs ahead of debt owed to commercial lenders based on the expectation that MLIs will act as countercyclical lenders and will extend additional financing at attractive terms when access to commercial funding is restricted. In other words, MLIs are lenders of last resort.
  • As sovereigns are, for accounting purposes, in arrears to an MLI if payment is more than 180 days late, the MLI will generally freeze additional loan approvals or disbursements until the arrears are cured. Should an MLI's participation in the G20 suspension not include compensation for most of the MLI losses, we would likely consider payments missed under the suspension to be in arrears after 180 days. Under our MLI rating methodology (see "Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology," Dec. 14, 2018), in assessing an MLI's policy importance and capital position, we take note of sovereign loans more than 180 days in arrears to the extent such loans comprise a significant proportion of the MLI's loan portfolio. Hence, a broad debt-service payment suspension, not compensating MLIs for most of their losses, would lead to multiple sovereigns being in arrears and would likely have negative credit consequences for affected MLIs.
How does S&P Global Ratings view IMF support to sovereign borrowers?

In general, S&P Global Ratings views IMF programs as helping stabilize, and in some cases indirectly enhancing, a sovereign's creditworthiness, especially in cases where the sovereign addresses the underlying structural problems that led to its seeking IMF assistance. We also view IMF lending as in the "official" lending category, so any change in terms to IMF lending would also not likely be viewed as a default under our criteria.

The IMF support can be through external financing programs or through policy support assistance. Such programs are designed to:

  • Help mitigate steeper declines in economic performance;
  • Mitigate higher fiscal financing costs and potentially higher debt service; and
  • Ease pressure on the balance of payments when market access is constrained.

To support countries affected by COVID-19, the IMF is currently offering US$50 billion worth of support packages, one-fifth of which is targeted at low-income countries under the Rapid Credit Facility, and the remaining $40 billion under the Rapid Financing Instrument at low interest rates. To date, in Africa (S&P Global Ratings-rated sovereigns), the IMF has granted new lending to Mozambique of $309 million (2% of GDP), to Nigeria of $3.4 billion (0.8%), to Rwanda of $109 million (1%), to Burkina Faso of $115 million (0.8%), to Democratic Republic of Congo (DR Congo) of $363 million (0.7%), to Senegal of $442 million (1.8%), and to Ghana of $1 billion (1.5%). In these cases, we view the IMF and bilateral assistance as helping cover additional costs of COVID-19-related expenditures and helping mitigate the deterioration in governments' finances and balances of payments.

The IMF has additionally approved the suspension of interest payments (debt-service relief) of $213 million on IMF loans for 25 low-income countries for six months under its Catastrophe Containment and Relief Trust instrument. Most of the 25 are in Africa, of which we rate six: Benin, Burkina Faso, DR Congo, Mozambique, Rwanda, and Togo. The suspension on its own does not reduce the low-income countries' debt-service amounts significantly because the suspended amounts are small and temporary.

What policy measures have African sovereigns implemented in response to the COVID-19 crisis?

African countries have experienced different levels of COVID-19 contagion. According to the Africa Centres for Disease Control and Prevention, the total number of confirmed cases in Africa on April 26 stood at 31,933 with 1,423 deaths. Several countries have imposed some form of lockdown (including South Africa, Nigeria, Ghana, Uganda, Rwanda, and Botswana) while others have imposed curfews (Senegal, Burkina Faso) restricting movement of people and economic activity.

The overall impact on the economy in each country depends on the contribution of impacted economic sectors to total output per country (see "COVID-19 Exacerbates Africa's Social And Macroeconomic Vulnerabilities," March 18, 2020). COVID-related stresses have pushed leaders of African governments to implement policy measures to reduce the adverse effects of lower economic activity. Governments are developing a mix of policy measures to mitigate businesses' and households' loss of income during the crisis period (see table 1 below).

Table 1

Summary Of Policy Measures
Policy measures Countries
Monetary
Injecting extra liquidity; collateral framework Central Bank of West African States and Central Bank of Central African States, respectively, for the West African (WAEMU)and Central African (CEMAC) monetary unions
Reductions in policy interest rates DR Congo, Egypt, Ghana, Kenya, Morocco, South Africa, Uganda
Reductions/removal of cash requirement ratios and other liquidity support measures Angola, Botswana, DR Congo, Kenya , Ethiopia, Morocco, Mozambique
Quantitative easing South Africa
Exchange rate adjustments Nigeria, Morocco
Fiscal
Increasing health spending Angola, Benin, Botswana, Cameroon, Congo-Brazzaville, DR Congo, Egypt, Ghana, Morocco, Mozambique, Nigeria, Rwanda, Senegal, South Africa, Uganda, Zambia
Reduction in tax rates (value-added tax, income tax) Kenya, Egypt
Temporary cuts in salaries of top officials Ghana, Kenya, South Africa

Angola, Cameroon, DR Congo, Ethiopia, Ghana, Mozambique, Nigeria, and Zambia have each provided fiscal support of around 1% of GDP, Botswana (1.1% of GDP), Congo-Brazzaville (1.6%), Egypt (2%), Morocco (2.7%), Rwanda (1.5%), and Senegal (2%). Some of the quantified support includes funding mobilized from donors and the private sector.

Some countries have also forgone tax revenue via temporary or permanent tax relief, which could also affect the fiscal outlook for those countries. For instance, Kenya reduced its value-added tax rate by 2% to 14% and income tax rates for both corporates and individuals by 5% to 25%.

Are some African sovereigns more vulnerable in their debt repayment capacity than others?

The majority of our sovereign ratings in Africa are in the speculative-grade category, with the rating rankings reflecting relative levels of vulnerability. Of the 22 sovereigns we rate in Africa, 19 ratings are speculative grade ('BB+' and below).

Four countries, Mozambique, DR Congo, Angola, and Zambia, are in the 'CCC' category and are very sensitive to changes in business and economic conditions, currently being exacerbated by the COVID-19 pandemic. We view these in the 'CCC' category as most at risk of a possible default on commercial debt.

Table 2

African Sovereigns With Speculative-Grade Ratings
Rating level Sovereign
BB South Africa
B+ Benin, Kenya, Rwanda, Senegal
B Burkina Faso, Cape Verde, Cameroon, Egypt, Ethiopia, Ghana, Togo, Uganda
B- Nigeria, Congo-Brazzaville
CCC+ Mozambique, DR Congo, Angola
CCC Zambia

About 60% of the external debt of the speculative-grade Africa sovereigns we rate is owed to official creditors (multilateral and bilateral creditors), while nearly 40% is owed to private creditors.

Chart 1

image

Among the African countries we rate, Angola, Congo-Brazzaville, Mozambique, and Cape Verde have the highest overall debt stocks (domestic and external) as a percentage of GDP, much of it denominated in foreign currency. However, although Mozambique, DR Congo, and Cape Verde have very high debt stock as a percentage of GDP, the composition of their external debt is skewed toward concessional external debt with long tenors and low debt-service payments.

Chart 2

image

Nigeria, Egypt, Angola, Ghana, and Zambia have limited fiscal flexibility due to high debt service as a percentage of fiscal revenue. Although Nigeria has moderate debt stock levels, its high debt service as a percentage of government revenue is high, primarily because of lower tax revenue relative to peers and relatively expensive domestic debt service.

Chart 3

image

About 13 countries among the 22 we rate in Africa have foreign currency reserves that do not cover their short-term external liabilities. These include Cape Verde, Congo-Brazzaville, Benin, Zambia, Ethiopia, Togo, Burkina Faso, Ghana, Nigeria, Senegal, Kenya, Mozambique, and DR Congo.

Benin, Congo-Brazzaville, Togo, Burkina Faso, Senegal, and DR Congo belong to either the CEMAC or WAEMU monetary unions, where they benefit from pooled foreign currency reserves and France's guarantee of unlimited convertibility to the currency pegs. Similarly, Cape Verde maintains a peg to the euro with implicit support from Portugal. The other six, Zambia, Ethiopia, Mozambique, Ghana, Nigeria, and Kenya, could struggle if they lost market access or if noncommercial concessional sources of external financing, such as the IMF, World Bank, or African Development Bank, were to fall sharply.

Overall, our rating levels speak to the level of default risk.

Chart 4

image

Chart 5

image

Table 3

African Sovereigns Ratings And Outlooks
Sovereign Foreign currency ratings and outlook*

Angola

CCC+/Stable/C

Benin

B+/Stable/B

Botswana

BBB+/Stable/A-2

Burkina Faso

B/Stable/B

Cameroon

B-/Stable/B

Cape Verde

B/Stable/B

Congo-Brazzaville

B-/Negative/B

DR Congo

CCC+/Positive/C

Egypt

B/Stable/B

Ethiopia

B/Negative/B

Ghana

B/Stable/B

Kenya

B+/Stable/B

Morocco

BBB-/Stable/A-3

Mozambique

CCC+/Stable/C

Nigeria

B-/Stable/B

Rwanda

B+/Stable/B

Senegal

B+/Stable/B

South Africa

BB-/Stable/B

St Helena

BBB-/Stable/A-3

Togo

B/Stable/B

Uganda

B/Stable/B

Zambia

CCC/Negative/C
*Ratings as of April 30, 2020.

This report does not constitute a rating action.

Primary Credit Analysts:Tatonga G Rusike, Johannesburg (27) 11-214-4859;
tatonga.rusike@spglobal.com
Ravi Bhatia, London (44) 20-7176-7113;
ravi.bhatia@spglobal.com
Secondary Contact:Alexander Ekbom, Stockholm (46) 8-440-5911;
alexander.ekbom@spglobal.com
Additional Contact:EMEA Sovereign and IPF;
SovereignIPF@spglobal.com

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