coordinated debt restructuring needed despite relief from DSSI extension

The G20 agreement to extend the debt-service grace period for low-income countries provides welcome but only short-term pandemic-related relief given the prospect of higher future debt repayments and medium-run debt distress.

The latest and possibly last extension of the Debt Service Suspension Initiative (DSSI) will result in further near-term savings for the world’s poorest governments, including those in Africa. These savings are, however, offset potentially by higher medium-run debt service payments, possibly of greater than originally suspended nominal amounts due to net present value (NPV) neutrality principles.

Extending the DSSI, as expected until the end of 2021, will aid African governments with severe liquidity shortages later this year but may also result in more significant debt servicing requirements over the medium term. The G20 framework’s extension ultimately ‘kicks the can down the road’ when acknowledging that many African governments require more substantive immediate debt restructuring to recapture market access at sustainable borrowing rates.

Suggesting a “DSSI+” restructuring architecture

We continue to suggest a more ambitious debt restructuring programme, referred to as the DSSI+, which builds on the existing DSSI architecture and goes a step further than the ‘Common Framework for Debt Measures beyond the DSSI’ announced by the G20 and Paris Club in November. (See Governments, Creditors Need DSSI+ Debt Relief Framework to Tackle Africa’s Solvency Crisis, 17 Nov 2020)

Recent requests by Chad, Ethiopia and Zambia for debt restructuring under the Common Framework beyond the DSSI are positive, but the Framework’s concentration on extension of debt maturity and, where applicable, debt reduction on NPV terms alone, risks not going far enough in resolving debt sustainability for heavily-indebted sovereigns such as Zambia. Moreover, both the DSSI and the Common Framework target low-income countries, leaving many middle-income countries vulnerable to debt crisis.

Existing DSSI framework does not enforce equitable treatment across creditor types

While private-sector creditors have been once more called upon to participate under this programme extension, the existing DSSI architecture lacks the required enforcement mechanisms that could ensure equitable treatment across creditor types in debt relief. This means that varying creditor types are likely to contribute to debt relief to varying degrees, undermining the capacity for DSSI to realise a more holistic vision such as the systematic inclusion of principal write-down as an applicable tool for issuers with solvency challenges.

As the composition of Africa’s debt continues to shift towards commercial and non-Paris Club creditors, a debt restructuring under more ambitious terms that involves a broader group of creditors including the private sector and multilateral creditors – with creditor parties accepting losses on equitable terms on interest and/or principal (including via outright principal write-down) – would potentially result in a temporary default credit rating for sovereign borrowers that require such support. However, a comprehensive debt restructuring that involves debt forgiveness could enhance the credit profiles of many poorer countries significantly after restructuring.

The value of this approach is in recognition that many African governments are in a weak position to deal with increased medium-run debt servicing requirements due to DSSI payment postponements, with half of all sub-Saharan African sovereigns at high risk of or already under debt distress before the Covid-19 pandemic arrived.

DSSI extension adds important fiscal space amid Covid-19 crisis, but also postpones today’s problems to tomorrow

This additional postponement of debt service is welcome for many of the 46 participating global governments in DSSI that struggle to locate needed funds to address urgent spending requirements and secure vaccine jabs. Still, it potentially places some of the most vulnerable borrowers at elevated risk of future debt distress. By postponing today’s problems to tomorrow, interest and principal payments may instead come due in a future period when there is less international support for multilateral debt relief than there is presently.

As such, borrowers and creditors may be missing out on an important opportunity to tap into present global solidarity to more sustainably address Africa’s solvency challenges amid a common unifying crisis.

Importantly, the DSSI extension does help prevent many low-income countries from falling further behind amid what is already a divergent global economic recovery. Nevertheless, designing debt relief that goes beyond DSSI as well as the Common Framework is still needed and could represent the difference between achieving a sustainable recovery for borrowing nations or a lost decade.

For a look at all of today’s economic events, check out our economic calendar.

Thibault Vasse is Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH. Dennis Shen, Director at Scope Ratings, contributed to writing this commentary.

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