“Only” 3,778 cases of COVID-19 were recorded in sub-Saharan Africa as of 1 April, according to the WHO. Whether the global pandemic is reaching the continent later or there are reporting challenges, it seems safe to assume that that these numbers will unfortunately rise.
Just like elsewhere in the world, COVID-19 puts Africa in a trying situation. It has the potential to quickly become a human tragedy, given weaker health systems. It is also turning into a deep economic crisis, with countries battling the fallout from the global recession and using their limited fiscal space to meet health needs, support their productive systems and protect jobs, amid high poverty rates and lack of safety nets.
The difference from the rest of the world is that some African countries were already clutching at straws before it hit. This year had started with Africa reeling from the effects of climate change, with East Africa’s crops ravaged by locust swarms; Mozambique just getting back on its feet after two cyclones; and Zambia and Zimbabwe grappling with the worst drought in forty years. China’s pandemic-induced slowdown caused a drop in commodity prices, with the breakdown of the OPEC+ talks the last nail in the coffin for oil prices. This week, Zambia announced it will enter debt restructuring talks with creditors. With the IMF categorising 16 of the 36 “low-income” SSA countries already either in debt “distress” or at “high risk” thereof before COVID-19 hit, the question increasingly being asked in the midst of this perfect storm is – “are the dominoes starting to fall?”
African countries are digging deep into the public purse to face this health crisis, but resources are limited. The World Bank estimates that Africa generally spends only half (5.2% of GDP) as much as the rest of the world (10% of GDP) on health. Redirecting resources to health spending or raising more will be challenging, so African countries have announced economic stimulus packages worth only 0.8% of GDP – about one-tenth of the Developed Markets average. Ghana, Senegal, and South Africa said they will tap the IMF’s Rapid Financing Instrument (RFI) to help meet public health needs. Others will likely follow. Yet RFI support is modest and targeted by design and, as economic crises deepen, some may well enter full-fledged IMF structural reform programs.
African governments are seeing revenues and capital inflows fall, as commodity exports drop, investment is put on hold, tourism grinds to a halt, and businesses shut down. Kenya’s cut-flowers industry – a top-three FX-earner (foreign exchange earner), with tourism and remittances – is operating at 20% capacity, as demand from Europe falls. Exxon Mobil may halt its $30bn Rovuma LNG project, which would be twice the size of Mozambique’s GDP. Nigeria’s largest trading partner, India (30% of exports), is in lockdown since last week and, as FX earnings from oil fall, pressures for a Naira devaluation keep rising. Angola faces similar challenges as 60% of its exports go to China. African workers in Europe and the USA, who send home around $50bn every year, may also face layoffs.
Borrowing necessary resources may also be more challenging as bond yields soar. Presently, international capital markets remain virtually shut to “frontier markets” with their weaker sovereign balance sheets (versus emerging markets). Yields on the debt of oil-exporting Angola, Gabon and Nigeria have risen sharply. Their response has been to revise lower the oil price assumptions in their budgets and reduce spending. But financing shortfalls will still ensue and meet rising borrowing rates, particularly for those that cannot count on deep domestic debt markets and a local investor base, like Nigeria. To be clear, debt management has improved across the continent over the last twenty years, with yield curves extending, issuance currencies diversifying and domestic debt markets growing, albeit from a low base. Still, even South Africa – with its fiscal deficit expected to balloon from the planned 6.8% of GDP to 10-12% of GDP this year – is facing higher borrowing rates, having lost its last Investment Grade rating (Moody’s) last week.
So it is increasingly apparent that some countries will struggle to meet their debt service commitments. Zambia has already said so. Moody’s has placed it with Angola and Ghana among half a dozen countries that are facing the toughest mix of high interest payments (35-45% of government revenues), increasing borrowing requirements and already elevated debt stocks. Although African Eurobond maturities do not increase meaningfully (to $6.2bn p.a. on average) until 2024-25, coupons still need servicing. Indeed, Africa’s debt burden has increased tenfold in the last 10 years as QE-induced low interest rates favoured new entrants in the Eurobond market. Zambia debuted in 2012 with a 10-year Eurobond at 5.625% – a rate cheaper than Spain’s at the time.
As calls for debt relief understandably increase, the elephant in the room is the more complex composition of Africa’s debt stock. Over the last week the IMF, World Bank and UNECA (UN Economic Commission for Africa) have called for debt relief, although the G20 did not endorse this. The Fund requested that its Catastrophe Containment and Relief Trust (CCRT) be replenished for this purpose. UNECA proposed a $44bn SPV (special purpose vehicle) to service Africa’s debt. Rumours abound right now but a plan is expected to be released at the IMF/WB Spring Meetings on 15 April. Depending on its goal – short-term debt relief or resetting debt profiles on sustainable paths? – it may ask concessions beyond multilateral creditors. The moral implications of any creditor’s choice notwithstanding, any concession is rendered more complicated by the fact that Africa’s debt composition has changed dramatically over the last decade. Zambia is again the perfect example, with its debt split almost equally four ways between Multilaterals, China, Eurobond investors, and other commercial creditors. Johns Hopkins University estimates that China has lent over $30bn to the continent since the Global Financial Crisis. J.P.Morgan’s EMBIGD Index now hosts 13 African countries’ Eurobonds – virtually all new post-GFC entrants. Investors bought Eurobonds to meet their clients’ return expectations and debt forgiveness will have fallout on pension funds and retail investors in the G7 too. Lastly, particularly during the 2014-2015 oil price slump, commodity traders and commercial banks significantly increased their exposures to African countries, with deal terms often not made public. Getting this diverse set of creditors to sit at the negotiating table is a task that may make Heavily Indebted Poor Countries (HIPC) look like a walk in the park and how it will be managed may impact investment appetite for the continent for some time to come.
The views expressed are those of the authors and do not reflect those of Allianz Global Investors