The coronavirus pandemic has reignited a conversation about debt relief to certain African nations as they look to fend off the kind of mass-scale spread seen in the U.S. and Europe.
Since African governments on average spend more on servicing debt than on health care, calls for debt freezes or forgiveness have been leveled at international institutions, such as the IMF and the World Bank, individual nations and private creditors.
Africa's largest single-state creditor, China, recently agreed to cancel the small amount of interest-free loans it has given to some nations, while the World Bank, IMF, and G-20 (Group of 20) have all begun emergency financing operations across the continent.
According to data compiled by Johns Hopkins University, there are now more than 405,000 confirmed cases of coronavirus across Africa, just under half of which are currently active, and the continent is facing its first full recession in a quarter of a century.
Fitch warned Tuesday that sub-Saharan African government debt burdens are escalating at a faster pace than anywhere else in emerging markets, increasing the risk of further burdens and defaults.
Opponents of debt relief often cite concerns about moral hazard, meaning a nation being granted relief is incentivized to increase its exposure to risk because it will not bear the full cost of that risk.
Elizabeth Rossiello, founder and CEO of Kenyan cross-border payments and trading platform AZA Finance, told a webinar on Friday that the perception of African debt is often misaligned with reality, and invited comparisons between Angola and 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," Rossiello told the panel.
"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?"
She suggested the key question should focus on the outcome if debt is not canceled, arguing that "the mountain is too high" and there is "no other option."
Joseph Rohm, CEO of specialist investment management firm Adventis, agreed that there was "enormous bias" in how African debt is treated in comparison with other parts of the world. However, he argued that the continent's credit market is more complicated now than in 2000, when the HIPC (heavily indebted poor countries) initiative 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," Rohm highlighted.
"Getting disparate lenders to agree on debt relief is much more complicated, particularly bondholders."
Impacting growth in capital markets
Rohm argued that disparity between the debt profiles of individual African nations meant that international treatment of African debt should be approached on a sovereign by sovereign basis. The IMF has modified the Catastrophe Containment and Relief Trust (CCRT) to provide immediate debt service relief for its poorest and most vulnerable members, and has also doubled its emergency lending facilities.
Rohm suggested that while short-term debt relief is undoubtedly needed, long-term relief was "unlikely and inadvisable."
"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," Rohm said.
"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."
Eurobonds are any international bonds that are denominated in a currency not native to the country where they are issued, and the past decade has seen a wave of issuance across the African continent. Many are denominated in U.S. dollars, but euro denomination has become increasingly common in recent years, particularly for countries with currencies pegged to the euro, such as the Ivory Coast, Senegal and Benin.
"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," said Rohm.
"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."