- The G20's interest payment moratorium aims to help free up fiscal resources in Africa to fight the COVID-19 pandemic.
- Across the 21 African sovereigns we rate, domestic interest burdens are higher than external interest burdens. The moratorium is only intended for external interest due, so it only addresses part of the story.
- While rated African sovereigns' external debt stocks are still dominated by official lenders, interest payments due to private sector creditors are higher than to official sector creditors. This is because the cost of borrowing from private sector creditors is much higher; official creditors tend to provide very low cost financing with long tenors.
- Any debt standstill agreement does not take away from the need to pursue the fiscal reforms and consolidation that will eventually reduce interest burdens and provide medium- to long-term fiscal flexibility.
The IMF and the G20 group of large economies are extending external debt service moratoriums, for at least six months, on their official external debt lent to low-income African sovereigns. This is to help free up fiscal resources in Africa to fight the COVID-19 pandemic. Subsequently, calls were made for private creditors to offer moratoriums on similar terms. Our article "COVID-19 And Implications Of Temporary Debt Moratoriums For Rated African Sovereigns," published April 29, 2020, discusses potential rating implications should various types of lenders grant debt service relief to rated African sovereigns.
Here, we look at our estimates of the interest payment profiles of the 21 African sovereigns we rate that could be subject to an external debt moratorium. We analyse the countries' interest payments profiles in line with our sovereign criteria, under which we primarily assess gross interest as a percentage of general government revenues as a key metric when assessing a country's debt burden. We exclude principal payments due (partly because they tend to skew regular debt service payments by being lumpy and one-off in nature). We put into perspective both domestic and external interest payments to reflect the relative burdens on the types of interest payments.
The Debt Moratorium Proposals
Given the impending global pandemic, in March and April the IMF, G20 leaders, the African Union, and the UN Economic Commission for Africa appealed to lenders to consider a debt service suspension initiative (DSSI; effectively a temporary moratorium on servicing external debt). This would allow governments to re-prioritize spending and address the challenges of the pandemic. What began as a G20 initiative on bilateral debt burdens was subsequently extended to different types of creditors--bilateral, multilateral, and private creditors. However, the uptake has been varied. Key aspects of the initiatives are:
- The G20 DSSI seeks to suspend interest and principal payments on external debt owed to official bilateral lenders. This would apply to sovereigns that are classified as IDA recipients; that is, low income countries. For a sovereign to participate in the program, it needs to be current on IMF and World Bank loan repayments (as well as agree not to access commercial borrowing beyond permitted parameters during the DSSI period).
- As part of the G20 DSSI, the Paris Club--a group of bilateral lenders--has so far granted moratoriums to 17 countries globally, totaling at least US$1.1 billion of principal and interest payments. Seven of these are rated African sovereigns: Burkina Faso, Cameroon, Ethiopia, DR Congo, Congo Republic, Togo, and Senegal. The DSSI interest moratorium is planned to run from May 1 to Dec. 31, 2020 but may be extended. Discussions with non-Paris Club bilateral lenders such as China are ongoing with individual countries; China agreed to join the G20-led agreement, having pledged to offer debt service relief on a case-by-case basis. For example, Angola has recently been approved for an external debt service moratorium on bilateral debt owed to China under the DSSI.
- Other multilaterals are taking a different approach to helping African sovereigns fight the health pandemic. For instance, the World Bank and African Development Bank have opted to support countries through enhanced disbursements, rather than temporary debt service relief. See "How Multilateral Lending Institutions Are Responding To The COVID-19 Pandemic," published June 9, 2020.
- In April 2020, the IMF granted debt service relief to 25 low-income countries across the globe---of which six are rated African sovereigns (Benin, Burkina Faso, DR Congo, Mozambique, Rwanda, and Togo) via its catastrophe fund. The moratorium is for six months covering April to October for debt service payments on grants owed to the IMF.
- Private creditors are following the discussions closely. Some have formed the Africa Private Creditor Working Group to discuss issues and coordinate responses. No firm commitments have been made, but both lenders and debtors plan to agree on case-by-case solutions to any potential external debt service moratorium that may be agreed (by both lenders and debtors). Some countries, particularly those with outstanding Eurobonds, are sceptical about participating. This is due, in some cases, to the strict terms of their Eurobond repayment plans, as well as a fear of losing market access to private creditors for a prolonged period.
The Pandemic Has Hit Already-High Interest Burdens Across Africa
Many rated African sovereigns were already facing high interest payments as a percentage of overall general government revenues (chart 1), even before the pandemic. Containment measures to combat COVID-19 are resulting in even lower tax revenues from reduced economic activity, and the need to scale-up health and social spending to protect vulnerable people and businesses is forcing expenditures up. Pandemic-related dynamics have forced governments to re-prioritize spending, possibly away from debt service and toward health.
Interest Payments Are Heavily Skewed To Domestic Payments
For our 21 rated African sovereigns we estimate that total interest payments (domestic and external) amount to about US$46 billion in 2020. In terms of shares of interest payments, five countries dominate: South Africa (29%); Nigeria and Egypt with 13% each; followed by Angola and Kenya with 10% each.
Chart 3 highlights that the interest burden lies predominantly with domestic market interest payments---which is more than 70% of total share of the 21 sovereigns we rate. All 21 bar three (Cameroon, Congo Republic, and Senegal) have higher domestic interest payments than external.
Even excluding South Africa, which has a very large domestic debt market (and which takes up a third share on its own), domestic interest payments still remain over 50% of the total, highlighting that interest rates and actions on domestic markets are very important (and not covered by the G20 initiative).
Six sovereigns--Angola, Egypt, Ghana, Kenya, Nigeria, and South Africa--dominate the overall interest payment numbers. That is, they contribute 85% of total domestic interest payments and about 80% of external interest payments.
Domestic interest payments are higher than external interest payments largely because almost all domestic debt is issued as market debt with interest rates largely set by market dynamics, while a large portion of external debt comes from official lenders---who provide many African countries with very cheap debt on highly concessional terms.
External Interest Payments Profile
Interest due to private creditors is higher than those due to official bilateral and multilateral lenders
To start, we classify interest payments in three categories:
- Bilateral: Interest payments made to debt owed to other (individual) governments, like China, France, or the U.K.
- Multilateral: Interest payments on debt owed to multilateral international institutions, which are typically owned by a host of governments, like the World Bank, the IMF, or the EBRD.
- Private sector: Interest payments refer to interest payments on debt held by private sector investors.
Both bilateral and multilateral are classified as official lenders, who usually lend on non-commercial, more-favorable terms. On the other hand, private creditors lend on commercial terms, typically demanding higher interest rates.
Chart 4 shows that interest payments to private creditors are the largest component (65%), higher than interest payments to official lenders. As mentioned, the difference is largely explained by cost of debt, where official lenders provide credit on cheaper non-commercial terms.
External interest payments distribution is highlighted in chart 5. Six sovereigns--Egypt, Angola, Kenya, South Africa, Nigeria, and Ghana--dominate with 80% of all 21 sovereigns' external interest payments in 2020. Egypt and Angola have the single largest individual shares. For these six sovereigns, negotiations with private creditors could reduce their interest burden substantially. However, they are currently not pursuing negotiations with private lenders.
From the $12.5 billion of external interest payments expected this year, we can make the following observations:
- About half the share of bilateral interest payments are owed by Angola and Kenya.
- Egypt has the single largest share of multilateral interest payments with 45% of the total.
- Private creditors are owed the largest chunk of total external interest payments.
The burden of interest payments is skewed toward domestic rather than external. Within external interest payments, interest owed to private creditors constitutes the largest category.
Many African sovereigns are still facing limited fiscal flexibility with high debt burdens and high fiscal deficits. At December 2019, rated African sovereigns owed about US$325 billion in debt denominated in foreign currency (see chart 8). To reduce the structural debt burden and improve fiscal flexibility, a debt moratorium is therefore unlikely to be enough; sovereigns will need to pursue domestic fiscal reforms, consolidating fiscally to contain interest burdens.
This report does not constitute a rating action.
|Primary Credit Analysts:||Tatonga G Rusike, Johannesburg (27) 11-214-4859;|
|Ravi Bhatia, London (44) 20-7176-7113;|
|Secondary Contact:||Gauthier Robinet, London 44-20-7176-0637;|
|Additional Contact:||EMEA Sovereign and IPF;|
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