Giving Africa a debt holiday may be in bondholders’ best interests. The poorest continent is due to repay around $40 billion this year, of which close to half is owed to private creditors. That’s cash governments desperately need to spend fighting the coronavirus. Lenders should heed the cry – and not just because of basic morality.
Although it arrived late in Africa, Covid-19 could wreak havoc on the continent’s 1.3 billion people. Public health systems are dire, with spending at less than 10% the global average. Even relatively well-off states like South Africa can only dream of the multibillion dollar packages underpinning stricken economies and population lockdowns in the West.
So far, African countries have requested a modest two-year delay to interest payments. That’s effectively the same as a Western business asking mortgage lenders or landlords for a few months’ forbearance. Given the cheques written elsewhere, multilateral lenders like the International Monetary Fund and big bilateral ones like China can hardly insist on receiving the $19 billion they are owed this year.
In order for the likes of China to grant relief, though, private sector creditors will probably also have to agree to take a hit. There are precedents for such relief. U.S. banks threw Mexico a lifeline in 1982 for fear of triggering a more serious default. After the 2008 financial crisis, European lenders did the same for countries in eastern Europe.
Generosity may serve private lenders’ own interest. Ratings agency Moody’s estimates that creditors lose up to two-thirds of their money in chaotic defaults. Heavily indebted Zambia, whose 2026 Eurobond is trading at 40 cents in the dollar, is a reminder of what could happen. Cutting others some slack now therefore makes financial sense.
Take Senegal. The interest payments and principal on its Eurobond due in 2033 are worth $1.13 billion in today’s money, if discounted at the 6.25% annual rate at which the country agreed to borrow. If Senegal delays this year’s and next year’s interest payments to 2022, that value drops by just $12 million, or roughly 1%.
Bondholders will also have to consider their commitments to environmental, social and governance principles. And high-profile envoys like Tidjane Thiam, the Ivorian former CEO of Credit Suisse, can make a compelling case in Western boardrooms. Beating Covid-19 means sacrifices all round. That should include Africa’s creditors.
The International Monetary Fund and World Bank spring meetings, which start on April 14, are set to consider African proposals for an additional $100 billion of financing to tackle the coronavirus.
In a March 22 joint letter, African finance ministers called for the immediate suspension of all sovereign and public sector debt repayments due in 2020, estimated at $44 billion this year.
The UK-based Jubilee Debt Campaign estimates African governments are due to make at least $37 billion in external debt payments this year, including $16.8 billion to private creditors.
China is Africa’s biggest bilateral creditor, having issued $145 billion in loans from 2000 to 2017, according to Johns Hopkins University’s China Africa Research Initiative.
The African Union on April 12 appointed Tidjane Thiam, former chief executive of Credit Suisse, as a special envoy to solicit international financial support for the continent’s fight against the coronavirus.