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Vol 61 No 7

Published 2nd April 2020

Into uncharted waters

Shutdowns, border closures and crashing commodity prices may cause an unprecedented financial breakdown

Copyright © Africa Confidential 2020

As cases of Covid-19 grow exponentially across the world, so do the public health and economic threats to African states as governments take action. With over 20 countries on the continent restricting movement and closing borders, finance ministers, coordinated by the UN's Economic Commission for Africa (ECA), held a conference call on 31 March to assess the damage and propose the establishment of special facility to deal with all sovereign debt obligations during the emergency.

This new facility is designed to be the negotiating forum for the continent. 'The call for debt-relief should be for all of Africa and should be undertaken in a coordinated and collaborative way,' said the ministers. African officials are concerned the region's range of debt-service obligations from dollar-denominated Eurobonds and Chinese countertrade deals to bilateral project loans and trade credits as well as obligations to the International Monetary Fund (IMF) and World Bank would weaken its negotiating position. 

In previous systemic crises, commercial and official creditors have secured country-by-country restructuring deals and write-offs.  

At a meeting on 16 March, ministers had calculated Africa would need an emergency financing package of US$100 billion, including a freeze on debt-service (AC Vol 61 No 6, Avoiding the nightmare). Now, ministers reckon the debt-freeze will have to last two to three years but they declined to put a price tag on it.  

As several hefty principal payments on African sovereign debt fall due between 2020 and 2022, this will drive up the cost of debt-restructuring. Historically, commercial creditors have moved faster than their public sector counterparts, with their debt traded on a secondary market. 

With the bulk of Africa's debt owed to governments or multilateral institutions, the IMF is set to be a key arbiter. But there are questions about its capacity and the political will of its board, dominated by rich countries. Already, 85 countries have asked the IMF for emergency help and that number is expected to double. Ghana, which has just completed an IMF reform programme but spent over 35% of state revenues servicing its debt last year, was one of the first countries to apply for emergency funding. 

On 31 March IMF managing director Kristalina Georgieva said the fund was borrowing more from its members after the United States, the biggest shareholder, had backed a doubling of the borrowing ceiling. That will take the take IMF's lending capacity up to $1 trillion, but many doubt it will be enough.

'Biggest crisis'
After describing the pandemic as the biggest crisis since the Second World War, the UN called on the IMF to allocate another $1 trillion through the special drawing rights, as well as finance a special $500bn fund for public health and social emergency spending. 

At a teleconference at Columbia University in New York, the IMF's Director of Strategy, Martin Mühleisen, said it was discussing halving 'the lead time for accessing emergency finance' to between two to three weeks.  

That prompted a call by Jeffrey Sachs, an advisor to UN Secretary-General António Guterres, for the IMF board to back immediate action to make money available to save lives. The monetary cost would be assessed later, argued Sachs, and much of it could be paid for by an international crackdown on illicit financial flows. 

Listening in, a financial analyst remarked that 'we have gone beyond all the previous worst-case scenarios' and should be preparing for radically different economic structures and relations between Africa and the international system after the pandemic. 

Africa's fiscal authorities and central banks were relatively quick to intervene, backed by trading partners and lenders. But many have been outpaced by the spread of the pandemic and uncertainty about its duration.  

It looks far worse than the global financial crisis in 2008-09, when Africa's economies had larger buffers than now to protect against a downturn. And the economy of China, its main trading partner, recovered quickly. 

Now, Africa has a more complex set of debt liabilities, including a higher proportion of commercial debt, less concessional debt, as well as substantial amounts of hidden or under-counted domestic obligations.

Copyright © Africa Confidential 2020

Swingeing increases in international bond yields for countries such as Zambia, Angola and Nigeria, and ratings downgrades for South Africa and its banks as well as for oil producers Angola and Nigeria, show the rapid deterioration. With copper exports slowing down, Zambia's ability to avoid default is in question (AC Vol 61 No 1, Point of no return). 

Africa's biggest spike in Eurobond redemptions is not due until 2024-25. But the crisis has closed the Eurobond market to African issuers, derailing many countries debt-financed plans to build infrastructure. 

Falling revenues for Africa's oil, mineral and commodity exporters mean debt service problems will escalate, as will national fiscal problems. Lockdowns in countries such as Ghana, Nigeria and South Africa will slow, sometimes stop, production cutting into corporate and personal tax revenues as well as indirect taxes. 

Foreign portfolio investors are already bailing out. Many big stock exchanges – including Lagos and Johannesburg – have seen steep falls in capitalisation. 

Nigeria and Rwanda are planning fiscal stimuli; Ghana, Kenya and South Africa have cut interest rates and are taking other action to boost domestic liquidity. Several countries say they will divert money to public health budgets but there are still chronic shortages of medicines, equipment and trained personnel. Meeting immediate needs for public health across the continent would take at least $10bn, says the ECA.

Production cuts
Restrictions on movement to counter the pandemic will cut farm production and local distribution as imports of foodstuffs and inputs for industry are hit by disruptions to global trade. 

Although gold prices are rising as nervous financiers look for more secure investments, disruptions to air routes mean that refined gold from South Africa is not reaching the London bullion market. 

As Saudi Arabia raises oil production in its squabble with Russia, global oil prices fall towards $20 a barrel, and lower, leaving cargoes unsold. These prices are close to African oil producers' costs of production. State revenues and domestic currencies are taking a hit but pressure is mounting on oil companies. Investments for longer-term oil production will be delayed as demand for oil falls, and lenders to the oil sector face more non-performing loans.  

This commodity production and price crash, together with the temporary shutdown of many trade and transport links across the continent, comes just months before African Continental Free Trade Area operations begin.

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