Debt-distressed African countries are expected to achieve successful debt restructurings and attract new waves of sustainability capital through private investment by 2024, according to a new report by Pangea Risk. The report argues that transparency in debt, good fiscal and monetary governance, and honest bilateral relations with creditors are indicators of effective debt treatments, while multilateral debt relief initiatives, such as the G-20’s Common Framework, have failed African countries.
The report cites Angola as an example of a model for African countries to chart a way out of debt, while Zambia and Mozambique provide “worst case” examples. The authors predict that at least three major African sovereigns will successfully restructure their debt in 2023 in order to avoid a default scenario by 2024. These countries are Ghana, Kenya, and Nigeria, which are each seeking a bespoke treatment of their obligations.
Kenya and Ghana are expected to achieve successful debt restructurings through extended maturities on foreign currency obligations, domestic loan swaps in exchange for concessional finance, and limited haircuts for some bondholders. In the case of Nigeria, an external restructuring is seen as improbable, but a domestic debt swap is said to be on the cards, despite concerns over its legality.
The report highlights that African countries need to strengthen the policy environment to ensure more private sector investment, “in particular sticky foreign direct investment (FDI) flows.” Mechanisms such as credit ratings, which restrict private finance and development funding in many countries, should be more reflective of local sovereign debt conditions, the political climate, and efforts to enhance debt sustainability. The authors argue that managed debt restructuring should be encouraged by creditors and future investors, rather than disavowed by credit rating agencies.
Multilateral debt treatment mechanisms such as the G20’s Common Framework have demonstrated “little worth in offering debt relief beyond the Paris Club [terms for relief set by wealthy lending countries] and should be reformed to address African countries’ more complex debt profiles”, according to the report.
The report finds that debt-distressed African sovereigns that have successfully undergone a managed debt treatment coordinated by multiple stakeholders, such as Angola, will be better positioned to benefit from private sector investments, including from sustainability and impact-focused investors.
Angola’s debt treatment and IMF programme have set a valuable model for other debt-distressed African countries and emerging markets to follow, while Mozambique’s protracted debt crisis provides a “worst case” example. Multiple debt restructurings in Mozambique since the emergence of its debt crisis in 2017 have been “reactive and often chaotically implemented, bringing little respite to bondholders”, a course that the authors see in other “messy defaults” such as that of Zambia.
“In the case of Mozambique, weak state institutions, lack of fiscal transparency, and poor debt management lie at the root of volatile relations with creditors and slow progress on debt restructuring agreements,” says the report.
The report concludes that African sovereigns that undergo managed debt treatments in 2023 in order to restore their borrowings to a sustainable path will be better positioned to benefit from impact investment in the coming years. It adds that African countries must address the policy environment to ensure more private sector investment, and in particular, “sticky” foreign direct investment (FDI) flows, to tap into an incremental pool of capital from sustainability and impact-focused investors.
