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The G20 countries (including China) have extended their support
to low-income countries most affected by the impact of the
coronavirus disease 2019 (COVID-19) on 13 November 2020 and
approved a historic common framework which will allow for the
restructuring of government debt deemed unsustainable. This debt
initiative will be in addition to the temporary external-debt
freeze extension under the G-20 Debt Service Suspension Initiative
(DSSI), which will end on 30 June 2021.
Private creditors are urged to participate in this initiative,
but it remains on a voluntary basis.
On 28 September, the IMF approved a six-month extension of the
temporary increase in the access limits of emerging financing
instruments. The Rapid Financing Instrument (RFI) is available to
all member countries, while the Rapid Credit Facility (RCF) is
available to low-income countries eligible for concessional
borrowing. The increase in access limits will apply until 6 April
2021.
On 18 November, Mohammed al-Jadaan, the finance minister of
Saudi Arabia, which holds the G20 presidency this year expressed
his confidence that the group of nations and the IMF could soon
agree on a new allocation of the fund's special drawing rights
(SDRs). "The SDR is an international reserve asset, created by the
IMF in 1969 to supplement its member countries' official reserves,"
per IMF definition. During the 2008 global financial crisis the IMF
issued an additional USD270 billion in SDRs to mitigate the impact
of the financial sector fall-out.
The
latest debt initiatives by the IMF and G-20 follow in the wake
of the Zambian government's default on its external interest
payment on 13 November. Zambia became the first country in the
sub-Saharan African region to default on its external debt
obligations due to coronavirus disease 2019
(COVID-19)-pandemic-related fiscal pressures. This follows the
30-day grace period for a USD42.5-million coupon payment on a
Zambian bond that expired on 13 November. On 20 October, the
Zambian authorities approached bondholders to freeze debt
obligations on three Eurobonds. Uncertainty over how Chinese
private creditors will be treated, the release of a relatively
scant 2021 national budget ahead of national elections scheduled
for next year, and lack of a comprehensive International Monetary
Fund (IMF) financially supported programme that could result in
debt sustainability over the medium term resulted in an
unfavourable outcome at the bondholders' negotiations. As a result,
IHS Markit has downgraded Zambia's short- and medium-term sovereign
risk ratings to 70/100 (CC+ on the generic scale) and left the
outlook unchanged at Negative. The Negative outlook reflects the
risk of a further downgrade of IHS Markit's medium-term sovereign
risk rating to 75/100 (C on the generic scale), in the Default -
Accumulating Interest Arrears category.
Zambia's strong reliance on net foreign direct investment (FDI)
and portfolio inflows as sources of current-account financing
leaves the country's short- and medium-term sovereign risk ratings
highly vulnerable to changing investor sentiment in the global and
local market. The government's fast-paced debt-financed
public-sector investment programme pushed up the
external-debt-to-GDP ratio to 117.5% at the end of 2019, while
debt-servicing costs took up a larger share of the country's
foreign-exchange earnings - 39.4% of total foreign-exchange
earnings at end-2019. By the end of 2019, Zambia's import cover
ratio fell to 2.2 months of imports of goods and services, while
net FDI and portfolio inflows turned negative. Adverse weather
conditions, lower global copper prices, and ongoing electricity
disruptions, combined with the government's unwillingness to access
concessional financing under an IMF support programme, added to
Zambia's external debt predicament. The Zambian authorities have
been reluctant to unlock further IMF support over the conditions of
fiscal consolidation, a lighter subsidy burden, and commitment to
business policy reforms. This left Zambia excluded from recent IMF
emergency funding under the RCF.
Other countries such as Angola with precarious external debt
levels were able to unlock financial assistance from the IMF
following favourable progress under an IMF Extended Credit Facility
(ECF). The financial safety net provided by the IMF and G-20
countries during the first half of 2021 will in IHS Markit's view
continue to advert a debt crisis in the region and benefit those
countries in good standing with the IMF.
The outlook for post-2021 could become more difficult as these
financial support channels closes. A shift towards fiscal
consolidation and growth enhancing policies will become more
pertinent, in IHS Markit's view.
Posted 04 December 2020 by Thea Fourie, Team Lead Sub-Saharan Africa Economics, IHS Markit