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Treasury & Capital Markets
EM debt levels call for write-offs, not relief
Creditor nations need to act quickly to avoid economic, social, humanitarian impacts
Keith Mullin 31 May 2023

Deep debt distress in many of the world’s poorest nations is having or is likely to have not just economic and social impacts but humanitarian consequences if matters are left as they are. Creditor nations need to act quickly and decisively.

But act decisively not to reach temporary debt suspension, standstills, moratoriums, reprofiling, rescheduling or restructuring. But to achieve widespread debt cancellation, forgiveness, write-offs – call it what you want – for the neediest countries lacking the wherewithal to repay. And let’s put an end to extending more debt to pay off legacy debt and to rescheduling debt and stringing it out over decades.

The G20’s Debt Service Suspension Initiative (DSSI), which ran from 2020 to 2021 suspended – note: suspended not wrote off – US$12.9 billion in official debt payments. Yet debt-laden emerging market (EM) sovereigns had to fork out something like US$35 billion in debt service in 2022. The DSSI follow-on programme, the Common Framework for Debt Treatments beyond the DSSI (Common Framework), is doubtless well-intentioned but has been widely criticized for moving painfully slowly; attracting too few debtor nations, and having the odds heavily stacked in favour of rich sovereign and multilateral lenders.

Only four countries have applied for Common Framework workouts (Chad, Ethiopia, Ghana and Zambia) yet the IMF's debt sustainability analysis for low-income countries listed nine countries in debt distress at the end of April and a further 27 at high risk of debt distress!

Wealthy countries need to do more. Of the US$100 billion of IMF Special Drawing Rights Western nations recently pledged to re-allocate to the benefit of developing countries, I understand only US$37 billion arrived. And even that is being re-allocated not in a single tranche to provide genuine assistance today, I’m told, but over 20 years.

Meanwhile, the April statement issued by the Global Sovereign Debt Roundtable, a grouping of multilaterals, sovereign and private-sector participants convened earlier this year to discuss ways of addressing debt sustainability and restructuring challenges, was bland. It noted agreement on the need to urgently improve early information-sharing on economic projections and debt sustainability assessments. And it supported the International Development Association’s provision of positive net flows via concessional finance and grant funding to countries at higher risk of debt distress. Beyond that, it committed to conducting follow-up work on technical definitions and perimeters. Not sure it took us much further in the urgent quest to deal with this pressing issue.


The fact that private debt is excluded from official restructuring initiatives is a major block on achieving clean solutions, since private debt now accounts for a non-negligible portion of today’s EM debt stock. How private debt is factored into debt solutions is a conundrum. Another roadblock has been Western multilaterals’ insistence on maintaining preferred creditor status for themselves; something to which China, now the world’s largest bilateral creditor, has rightly and reasonably objected, although its implacable opposition has softened given backroom quid pro quo concessions elsewhere.

Market participants believe the situation for low-income countries is much worse today than during prior periods of economic stress of recent decades and that the effects on poor debtor nations are more pernicious. Low-income countries, many in sub-Saharan Africa, have gone from being relatively debt free after the world’s richest countries wrote off chunks of their debt early in the 21st century to once again having unsustainable debt levels. The only surprise is that more sovereigns haven’t defaulted. But many say it’s only a matter of time.

The long period of super-low interest rates after 9/11 drove heavy debt inflows into higher-yielding emerging markets. African and other EM borrowers became relatively frequent borrowers. Developing nations were also recipients of lending from China’s massive Belt and Road Initiative; well in excess of US$100 billion in the case of Africa and some of that on commercial terms.

Write off worthless debt

Looking at the prices that Henry Avis-Vieira at exotic debt specialist WesBruin Capital provides for research purposes, a lot of frontier-market loan and trade facilities are marked at close to zero. This includes restructured and unrestructured debt, much of which is past-due or in default. Debt that is marked at pennies on the dollar is never going to be repaid but continues to be a burden on governments facing destitution. It needs to be written off once and for all, and cancelled.

Debt marked at hyper-distressed levels is mainly in sub-Saharan Africa and includes certain bank and trade lines to the likes of Central African Republic, Chad, Djibouti, DRC, Ethiopia, Mali, Mauritius, Mozambique, Niger, Rwanda, Sierra Leone and Togo. But WesBruin’s hyper-distressed list also includes debt to the likes of Cuba, Lebanon, Nauru, Nicaragua and North Korea. And, unsurprisingly, Iraq, Libya, Syria, Sudan and Yemen, lending in these cases a literal meaning to the term ‘bombed-out debt’. A whole bunch of other countries have facilities marked at distressed levels, including past-due trade debt to countries like Cambodia, Nepal, Suriname, Turkmenistan and Uzbekistan.

Debt service or economic wellbeing?

Allocating scarce tax revenues to servicing debt means less money allocated to health, education, housing, infrastructure, job creation and the well-being of citizens. This flies in the face of poverty reduction, a supposed hard-wired goal of the international community. Case in point: I was told recently that more than 60% of Pakistan’s tax revenues will go to meet interest payments in 2024. With reserves below US$4 billion, many believe it’s only a matter of time before the country is forced into default.

Elsewhere, Egypt has a crushing debt burden that some say needs to be slashed by one third to a half before it becomes sustainable. There are grave doubts, meanwhile, that Kenya will be able to refinance its US$2 billion 6.875% bond falling due in June 2024, although the government recently closed a US$500 million dual-tranche syndicated loan that will soften the burden.

For emerging and frontier market borrowers that have had capital markets access, higher benchmark bond yields and wider credit spreads are stifling access to refinancing or new financing at affordable levels just as international yield tourism has ceased as the returns available closer to home are at levels not seen for years. For EM borrowers, printing new paper demands multiples of rates required in previous years. The African component of the Bloomberg index is now around 2.5 times the EM average. In June 2021, it was trading flat.

The debt redemption wall has been deferred somewhat through liability management exercises prior to 2022, but around US$10 billion of sub-Saharan Africa sovereign bonds fall due in 2004 and 2025.

Dealing with political and economic management issues (or mismanagement in some cases) and the toxic effects in some countries of internal conflicts or full-blown civil wars that are destroying fragile infrastructure and economic prospects and creating huge internal displacement of citizens has been a long-run burden. But governments now are also faced with a number of global adverse factors beyond their control: slowing global growth, high inflation, rising interest rates, depreciating currencies, US-China tensions, war in Ukraine and food security concerns, all coming on the heels of the pandemic.

We need action now. Not talk.

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