African debt relief: Freeze, forgive or forget?

 African debt relief: Freeze, forgive or forget?

The COVID-19 pandemic could potentially trigger a wave of defaults around the world. 

Before the outbreak of Covid-19-19, global debt levels reached an all-time high of nearly $253 trillion, about 320% of global GDP.

This has triggered panic especially in developing countries, with some rushing to welcome G20 offer to freeze while others think more should be done to save them. 

Africa spends more on servicing debt than on healthcare. Few would argue such imbalances demand radical change. 

However, as of today, there is no consensus on how to resolve Africa’s debt portfolio even in the face of the coronavirus pandemic and the wide ramifications on the economies so Africa is yet at another crossroads.

Market intelligence engaged debt management and economic experts in the continent on this topic, here is what they said. 

How do you balance the need for debt payments relief against a history of a moral hazard on debt for a number of African states? 

Elizabeth Rossiello: It’s interesting to compare perception against reality. Take a country like Angola compared with, say, Argentina. Argentina reneged on its debt nine times and yet three years ago became the first junk-rated country to sell bonds with no repayment required for a century. Angola hasn’t defaulted since the end of its civil war in 2002 and yet bondholders charged a higher rate of over 9% for shorter-dated bonds. 

So is there some sort of truth in bad behavior, or is it more of a bias against African markets? The real question is what will happen if we don’t cancel the debt? I think the mountain is too high to climb. There is no other option.

What are the lessons from previous experience of debt cancellation?

Joseph Rohm: First, just to say, I agree with Elizabeth. I think there is enormous bias around how Africa’s debt is treated. But you asked about lessons from history. I think one of the things one must be aware of is that the situation is very different now.

 The reality is that Africa’s credit market is much more complicated than it was in the early 2000s when HIPC and the Paris Club granted debt relief. Effectively Africa at that time owed money to wealthy countries. It’s not just the arrival of China. Private lenders now own more than 30% of Africa’s debt so that’s been a huge shift. Getting disperate lenders to agree on debt relief is much more complicated, particularly bondholders. 

Clearly, there are also huge differences from country to country in terms of their performance and their need for debt relief, so I would argue you need to look firstly on a sovereign by sovereign basis. Some countries desperately need debt relief and you can see which ones they are – the IMF has provided rapid finance facilities at very short notice. But others are doing relatively well.

I don’t think anybody would argue that Africa doesn’t need short-term debt relief but I think long-term debt relief is unlikely and inadvisable. What are the implications of long-term debt relief? Is it actually the best way to attack poverty and development going forward? I would say ‘no.’ One of the risks of debt relief is damage to the growth of capital markets in Africa and to those Africans desperate for capital to feed companies. 

The Eurobond market has been an enormous success for Africa, but local currency funding from international investors and public equity markets have grown at a dismally low rate. 

One of the dangers of talking about a blanket debt relief is you damage the potential growth of capital markets at a time when African corporates in particular need access to capital probably more than ever before, and that’s partly because the African continent is performing much more strongly than it did 20 years ago. 

Africa is one of the few parts of the world that has been delivering strong growth, following Southeast Asia, so there’s this huge need for development finance and capital to grow businesses.

How do we ensure debt responsibility during cycles, in particular for commodity-driven economies?

Von Kemedi: What’s important is to make sure that the economy is robust enough to manage. Bondholders and countries that extend debt or that relieve African countries must have an agreement with the government that the funds will be channeled strictly to specific projects that can support repayment rather than being used to supplement expansive government.

How can Africa’s debt negotiations be leveraged to bring lasting benefit to the people?

Elizabeth Rossiello: Real mid-sized businesses have driven the economic boom in European markets, South American markets, East Asian markets – but these businesses have been crowded out of licensing, crowded out of government contracts, crowded out of available opportunities in Africa. Those that don’t have uncles and fathers in parliament still don’t win licenses.

 I think we would see a radical change in completion level and execution if we can increase competition and let smaller players in. We are really missing competition in this market. The Nigerian electricity sector is one example: a lot of electricity is produced but transmission is the problem. While there are many solutions to that all over the world, companies are not being allowed to enter the market and give it a shot. So, I’d love to see international financiers and governments include SMEs and mid-size businesses in government contracts and really let’s see this as the necessary change and push forward transparency and also more competition.

Two CEOs of African banks, Ecobank and Equity Bank, said they are not in support of debt cancellation for Africa. What are your thoughts? 

Elizabeth Rossiello: I think they’re speaking to the fear that debt forgiveness is used for inappropriate purposes, like supporting currencies that should be free-floating. Crowding out the private sector is a big problem, and Ecobank and Equity Bank are real champions of the continent, showing how private brands can grow their market. 

Some of these super brands have come in replacing the focus on international poverty debt with development debt, and it’s awesome to see Equity Bank and Ecobank move in and take some of those pipeline investments. Kenya has become a banking lion in last decade really. 

What does China want to achieve with the Africa debt relief program?

Joseph Rohm: China now owns just over 20% of Africa’s external debt. In the last 10 years, it has become the major lender on the continent. But China has a very nimble and flexible approach, and has actually been renegotiating debt with Ghana, Zambia and Angola fairly recently. 

While we don’t have all the details around that, it’s clear that China has been very effective at restructuring loans, turning debts into 99-year port leases, for example. China will be saying, we are very happy to restructure again but we don’t want to be the only ones doing that and we would want to do it alongside multilateral and bilateral organisations. Why should we be the only ones restructuring? 

Is the African debt cycle a blessing or a curse? 

Von Kemedi: The African debt cycle is definitely not a blessing. What’s happening is that we are taking in too much debt and our economies are not robust enough to repay this debt, and so it becomes a question of going back to the creditors to appeal for rescheduling or cancellation.

That shouldn’t be the case. We should be able to go to the table like anyone else and discuss business rather than coming to beg for debt forgiveness. For us to have strong economies that can manage this debt we need to have a more vibrant private sector and this happens in the small and medium size sector. 

Elizabeth Rossiello: We need to have liquidity. We need to have people willing to buy and sell this debt. That means we need healthy capital markets, we need more competition, we need more brokers.

 In the small city of Zurich, in the small country of Switzerland, where I started my career, there are thousands of brokers making a market between the Swiss franc and the Euro, which never really moved anyway. And then you go to the city of Lagos, one of the most bustling and vibrant metropolitan areas on the planet and one of the fastest-growing populations, and you can count the number of brokers and market makers on your two hands. What we need to see is more people step in. 

The problem on the continent is is the fear that no one will be able to settle and everything will evaporate. If authorities simply gave out more licenses, we would see more players come into the space and some of this achieved.

Joseph Rohm: One of the big successes is the Eurobond market. Africa has raised $55 billion in the last two years alone from the Eurobond market. This is attractive financing because in dollar terms it’s quite cheap, but it’s not linked to specific projects and too few questions are asked around the use of funding.

What is the role of pan-African institutions in debt implementation?

Von Kemedi: Most credit from the African Development Bank has been going through governments to support projects and other state expenses. 

This is not sustainable. The African economy needs to generate more from the private sector to become more robust. Of course, the AfDB are doing very well in terms of credit ratings for the bank, which is really good for the continent, but what is required is for the African Union to work with the African Development Bank to address the unsustainable flows that we are now dealing with.

 In Nigeria and Angola, for instance, the amount of money spent on just paying down interest not to mention even the capital is just too much. We must come together and convince the rest of the world that we seriously need to reduce our cost of government very, very drastically. 

What’s not going to work is continuing to run expensive governments and at the same time convincing people that debt rescheduling or debt cancellation will not simply go to subsidizing that very lifestyle.

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