All Eyes on Africa’s External Financing Needs

All Eyes on Africa’s External Financing Needs
Rising debt levels and potential solutions for debt relief featured prominently at the 2020 IIF Annual Membership Meeting with a particular focus on escalating financing needs in Africa. Vulnerable low-income countries in the region have seen an unprecedented surge in government financing needs as the COVID-19 pandemic wears on.

The sudden stop in cross-border investment, trade, and tourism flows has greatly weakened the budget balances of many sovereigns while undermining their revenue generation capacity.

In 2020, the government debt-to-revenue ratio will reach over 480% across the 35 Sub-Saharan African (SSA) countries that are eligible for the G20 Debt Service Suspension Initiative (DSSI)—an increase of more than 100 percentage points (Chart 1). Although debt ratios are expected to start declining once countries start to recover, new (low tourism) and lingering (low tax base) challenges in revenue generation will likely keep external financing needs at elevated levels going forward.

Chart 1: Government debt in SSA DSSI-eligible countries

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Source: IMF, IIF

We estimate gross 2021 external financing needs of DSSIeligible SSA countries at $127 billion (9.7% of GDP)—only slightly lower than the $133 billion (10.8% of GDP) seen in 2020 (Chart 2). However, striking differences persist across countries with financing needs in 2021 varying from 2.5% of GDP in Comoros to near 100% in Mozambique. Of note, external financing needs are expected to account for more than 20% of GDP in Angola, Burundi, Liberia, Malawi, Niger, Mozambique, and Zambia next year.

Chart 2: DSSI countries in sub-Saharan Africa have very high external borrowing needs

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Source: IMF, World Bank, IIF estimates

With debt service payments to foreign investors making up half of the gross financing needs in 2021-2022, it will be critical for low-income countries to improve their revenue generation capacity and maintain/expand international market access—both for pandemic recovery and to achieve the UN’s Sustainable Development Goals—see Financing a Sustainable Future for Emerging Markets.

At present, official bilateral and multilateral creditors comprise the majority of all external creditors for many LICs. The surge in total external debt across the 35 DSSIeligible SSA countries over the last decade (from $145 billion in 2009 to $382 billion in 2019) has largely been driven by public and publicly-guaranteed (PPG) debt (above $270 billion), of which official creditors hold 70%.

With strong bond issuance activity in recent years, the rise in debt held by foreign private creditors has been striking, increasing from $15bn in 2009 to over $80bn in 2019. At present, the private sector represents the largest portion of PPG external debt for 10 countries in the DSSI-eligible SSA universe.

Since the start of the pandemic, however, there has been no new international bond issuance from these countries—in contrast to the pick-up in issuance activity in other EMs and frontier markets. While this partly reflects the adverse impact of higher borrowing costs in secondary markets (Chart 3), the wave of recent rating downgrades appears to have weighed on many sovereigns’ appetite to tap capital markets despite improving global liquidity conditions. Notably, issuance has also been subdued in domestic debt markets compared to previous years (Chart 4).

Chart 3: Borrowing costs are still above pre-pandemic levels

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Source: Bloomberg, IIF

Chart 4: Subdued issuance in domestic debt markets

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Source: Bloomberg, IIF; * non-investment grade < 11

The pandemic has also prompted a reversal in cross-border banking inflows. BIS-reporting banks cut exposure to DSSI-eligible SSA countries by $2.4bn in Q220. However, the retrenchment inflows were smaller than during the peak of the 2008/9 global financial crisis and were largely concentrated in Angola and Liberia. Excluding these two countries, banking inflows remained in positive territory.

Overall, 16 DSSI-eligible countries continued to attract net banking inflows, highlighting the willingness of private-sector creditors to continue supporting these countries.

Looking ahead, external debt service payments on PPG debt across the 35 countries will amount to roughly $30.5 billion in 2021—slightly higher than the 2020 number (Chart 5).

Chart 5: Estimated debt service payments to bilateral creditors, long-term public and publicly guaranteed external debt

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Source: World Bank, IIF

World Bank estimates suggest that nearly 30% of the total is due to official bilateral creditors in China, and other bilateral creditors represent an additional 10%. While commercial banks account for over 20% of estimated debt service payments in 2021, the limited data available suggest that over 55% of the repayments to commercial banks appear to be associated with the China Development Bank (CDB).