African sovereign debt poses challenges for ECA activity
The spectre of increasing sovereign debt has the potential to swamp future export finance deals and projects in several African jurisdictions.
The changes to the OECD Arrangement on officially supported export credit financing put forward in March this year has been ‘music to the ears’ of all those in the industry calling for fundamental reform. We expect to hear more detail from the OECD in July, but from the provisional announcement it looks like tenors on certain transactions will be extended and repayment schedules relaxed for deals in certain sectors, giving greater impetus to deals and projects in the energy transition arena as well as providing a boost to social infrastructure transactions. See my article earlier this year for more details.
This announcement has been strongly welcomed by those working in emerging markets, and particularly those active in African markets where so much basic infrastructural and social project work is required, and opportunities abound. And with strong growth forecast in a number of countries – eg Senegal with GDP growth of 8.3% this year, Cote d’Ivoire 6.3% and DRC with 6.3% - these are the countries where ECA-backed finance will be key. However, as everyone knows many African markets are seen as being challenging largely because of a range of serious risks – and the main ones are often cited as: the debt trap, coups, civil war, terrorism and political risk. In fact, at a recent TXF conference I learned that there are currently 68+ armed conflicts taking place across Africa – when I had originally estimated 40.
But – even though there is always the fine equation between the perception of risk and the reality of risk - it is probably the burgeoning sovereign debt issue and the overall risk of default which could deter banks, financiers, investors, sponsors, export credit agencies (ECAs), and certain developmental financial institutions (DFIs) from proceeding with deals and projects in certain African markets unless debt restructuring solutions are worked out to get some countries back on a more even keel. Zambia is one such country that has not managed this – as it defaulted (on its Eurobonds) back in late 2020, and is still currently stuck in its debt trap.
Commenting on the issue of Zambia, one well-known international export finance lawyer recently stated: “Sadly there is no international legal framework for sovereign debt restructurings. Creditor fragmentation over this century has meant that reaching a consensus is nigh-on impossible.”
The lawyer added: “And, given the amount of debt it has advanced to developing countries, it is not surprising that China is pushing hard in the Zambia negotiations to upend decades of convention, asking multilaterals such as the IMF and World Bank (as well as local bondholders) to suffer comparable haircuts to private creditors rather than effectively being ‘super senior’. Whether this is acceptable to the multilaterals or not is likely to have a big impact on the extent of the real-world impact of drawn-out debt restructurings on overly indebted countries for the next decade or more.”
Of course, the issue of the level of Chinese debt with African countries – compared to that resting with the ‘West’ and other Asian nations - is one of serious concern for ECAs, DFIs and financiers alike. Out of the sub-Saharan African nations, Angola holds the most Chinese debt, followed by Zambia and the Democratic Republic of Congo (DRC). Chinese debt is usually with China Development Bank, and/or China Exim. Some have referred to this debt relationship as the new colonialism in Africa – but it needs to be said that China has gone into many African countries and financed projects where ‘Western’ and other Asian backers have largely ‘feared to tread’.
However, in any kind of debt restructuring where the International Monetary Fund (IMF) is involved there invariably tends to be a good degree of political football taking place with Chinese debt on one side and conditions from the IMF on the other side. It is estimated that African countries owe China around $85 billion – to $90 billion, by conservative estimates. Kenya is another country with big Chinese debt – estimated to be around $9.2 billion according to Chatham House last year.
Egypt in the spotlight
In talking about Africa there are 54 sovereign countries – and of course this includes all those above the Sahara. On the export finance front, the most active ECA-African market last year was Egypt according to TXF Intelligence. And, out of the MENA (Middle East & North African) region, Egypt was also the most active in the ECA market last year.
There were some great deals done in Egypt in 2022 – so much so that three Egyptian ECA-backed deals won TXF Export Finance Deals of the Year – deals which will be presented with awards at the TXF Global Export Finance Conference in Lisbon in mid-June. These transactions had a cumulative value of $3.99 billion, and involved the ECAs Serv of Switzerland, Sace of Italy and Euler Hermes of Germany.
However, there is concern at the country’s fiscal situation, which has led some agencies to act. In late March this year, the Belgian ECA Credendo stated: “In spite of support from the IMF, liquidity pressures and hard currency shortages persist. It is considered key for Egypt to implement structural reform measures to unblock additional external support and ease liquidity pressures. Given persisting foreign exchange scarcity and the challenging economic and financial environment Credendo has decided to downgrade Egypt’s short-term political risk rating from category 5/7 to category 6/7.”
Credendo also noted that the Egyptian government needed to adhere to stipulations laid down by the IMF. The Belgian agency stated: “A critical obstacle seems to be the perception that Egypt is not implementing key reforms agreed under the IMF agreement fast enough, in particular the sale of public assets and the shift towards a durable flexible exchange rate regime despite three earlier devaluations (see graph above). These reforms are considered paramount to unblock additional financial support. A perceived slow implementation of key reforms could delay foreign investment and hence extend liquidity pressures.” In addition, it also said: “A positive note is that discussions with regional partners and other shareholders about the sale of stakes in public enterprises are ongoing.”
Analysis by specialist Africa-Middle East intelligence advisory company Pangea-Risk in May, noted: “Egypt's struggling economy has faced significant challenges over the past year, including a devalued #currency, limited forex reserves, and high inflation. As a result, Egypt's Gulf partners have shown waning interest in providing unconditional aid, given the country's uncertain fiscal outlook. This reduced support is further compounded by structural issues within the Egyptian economy, such as weak property rights and institutions, and an overbearing state and military. Egypt's heavy reliance on Gulf financing also poses potential constraints to its foreign policy, requiring the country to balance the competing interests of the UAE, Saudi Arabia, and Qatar, while scaling down its involvement in regional issues.”
Egypt is a very exciting market with plenty of good opportunities, but the fiscal concerns could eat into market appetite. ECA-backed deals will continue in Egypt, but some financiers may become a little more concerned and pricing could increase according to any downgrades by relevant agencies.
Ghana rises above the waves
Ghana is one country that has provided a positive among debt-strapped countries and has managed to work out a recent restructuring with the IMF. The Ghanaian government stopped servicing its external debt back in December 2022 and defaulted. In March this year, Credendo noted: “The sovereign debt crisis and gloomy global environment have put the entire economy under stress. Finding common ground among creditors for debt restructuring will be vital in the coming weeks to unlock financial support from the IMF.”
Decreasing international reserves, currency depreciation, rising inflation and plummeting domestic investor confidence, eventually triggered an acute crisis and resulted in a loss of international market access.
Then following a domestic debt exchange in late April by the Ghanaian government in mid-May, the IMF was able to approve in mid-May an Extended Credit Facility programme for Ghana worth $3 billion over three years. The move enables the immediate disbursement of about $600 million to the West African nation.
The IMF said: “The programme will help Ghana overcome immediate policy and financing challenges, including through its catalytic effect in mobilising external financing from development partners and providing a framework for the successful completion of the ongoing debt restructuring.”
IMF managing director Kristalina Georgieva, also noted. “The creditor committee’s action recognises the Ghanaian authorities’ strong reform programme…It also signals that further progress is being made under the G20 Common Framework, demonstrating that international partners are ready to work together to help countries resolve their debt issues.”
Pangea-Risk reported: “The IMF’s approval of a funded programme for Ghana will provide policy anchorage, enhance the balance of payments, mobilise additional external financing, and lay out a framework for completing its debt restructuring. However, complex and protracted negotiations with Eurobond holders and commercial creditors lie ahead in coming months. Nevertheless, Ghana’s economy is already showing signs of improvement, particular in the gold sector, even while inflation slows and the local cedi becomes the world’s best performing currency.”
Serious concerns over Nigeria
Serious concerns around debt remain for certain other countries – particularly Nigeria, where the debt service to revenue ratio is exceptionally high. The World Bank put this ratio at 96% for 2022, and economists have stated this has risen further through the course of this year.
Following a country downgrade, Fitch ratings said earlier this year: “The downgrade to ‘B-’ reflects continued deterioration in Nigeria’s government debt-servicing costs and external liquidity despite high oil prices in 2022. Low oil production and the expensive subsidy on petrol have consumed most of the fiscal benefit of high oil prices in 2022 and will continue to stress already low government revenue levels.”
The new Nigerian president, Bola Tinubu, is expected to face considerable internal pressure on any controversial economic reforms, and analysts point to a real danger of civil unrest particularly around the ending of fuel subsidies and exchange rate reforms. Any kind of debt restructuring for Nigeria has significant hurdles.
Robert Besseling, CEO of Pangea-Risk warns that if: “Nigeria’s central bank does not cease controversial direct budget financing and development funding policies..., the country’s debt position will significantly deteriorate and make a painful restructuring inevitable.”
Nigeria is the largest economy in Africa and the most populous, and although ECA deals there are relatively rare, its economic health for the continent is massively important.
In terms of further reading, please check out the White Paper – The Politics of African Debt Restructuring. Published by Pangea-Risk along with Acre Impact Capital, the paper focuses on the need to prepare Africa’s distressed sovereigns for a new wave of sustainability capital. The report finds that by 2024, many of Africa’s debt-distressed sovereigns will have successfully restructured their most unaffordable loans, whether domestic or external obligations, placing these countries in much better stead to attract private investment, in particular from sustainability-focused and impact investors to address the $100 billion annual infrastructure financing gap.
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