African debt storm

The Emerging Markets Institute’s summer internship is an excellent opportunity for undergraduates from all over the world to gain skills in, and get exposure to, emerging market research under the guidance of distinguished Cornell EMI faculty and other global experts in the field. In light of the fact that many of the world’s fastest-growing economies are reeling from the punishing economic fallout of the COVID-19 pandemic, this summer was quite possibly one of the most important moments in history to analyze emerging markets.

According to the World Bank’s August 2020 baseline forecast, the current period of economic contraction is predicted to be the deepest global recession since WWII. Reuters reports that the staggering socioeconomic ramifications of this crisis in poor and heavily indebted African nations might push an estimated 26 million to 39 million Africans into extreme poverty as well as undo decades of developmental progress.

Even though the African continent has reported relatively low numbers of confirmed COVID-19 infections, the combination of soaring levels of external  debt, declining productivity in domestic markets, and a dramatic decrease in global commodity prices could prove a perfect storm in Africa, unprecedented in both scale and complexity.

In an opinion piece published in The New York Times, “Why the Global Debt of Poor Nations Must Be Cancelled,” the prime minister of Ethiopia and 2019 Nobel Peace Prize winner Abiy Ahmed wrote: “In 2019, 64 countries, nearly all of them in sub-Saharan Africa, spent more on servicing external debt than on health. Ethiopia currently spends twice as much on paying off external debt as it does on health.” Prime minister Ahmed goes on to say that “the dilemma that Ethiopia faces is stark: Do we continue to pay toward debt? Or, do we redirect resources to save lives and livelihoods?”

The International Monetary Fund recently estimated that nearly all sub-Saharan economies are headed for their worst GDP decline on record. The risks associated with this debt crisis are manifold, and immediate action from global creditors in the form of debt relief is imperative for minimizing the potential of widespread insolvencies and humanitarian disaster. The consequences of inaction are dire, and regardless of how this situation unfolds, it is sure to be one of the most salient and challenging economic conundrums of this decade.

Common forms of debt relief

• Debt cancellation: a writing off of part or all debt owed
• Debt restructuring: a renegotiation of the terms (for example, interest rate, grace period, maturity, or fees)
• Debt reprofiling: An extension of the maturity
• Refinancing: A new issuance, extending the repayment schedule and possibly lowering interest rates

The G20 Debt Service Suspension Initiative

In April 2020, the G20 announced a Debt Service Suspension Initiative (DSSI) enabling up to 77 developing countries to request a postponement of their debt payments through the end of 2020. The G20’s initiative publicly calls on all official bilateral creditors, private creditors, and multilateral development banks to offer a time-bound suspension of debt service payments for the poorest countries requesting forbearance.

Commercial lending to Africa governments surged after the great recession

Since 2008, a prodigious amount of private capital has entered the African continent. In the wake of the recession, interest rates in rich countries sank to historic lows, which, in turn, prompted fund managers to direct their focus overseas in search of higher yields. African government bonds were appealing, due to the large profits of the ongoing commodity boom. Today, bonds make up over 30 percent of Africa’s foreign debt. Such high levels of indebtedness by economies so heavily reliant upon commodity exports such as oil render many African nations particularly vulnerable to external shocks. 

Chinese lending in Africa

China is the world’s largest bilateral creditor and the single largest foreign lender (and foreign direct investor) in Africa. Such lending from Chinese institutions to African governments has increased considerably over the last decade, and, due to the opaque nature of these lending practices, they have now come under increased scrutiny on the world stage.

The China-Africa Research Initiative at Johns Hopkins University estimates that between 2000 and 2018, Chinese lenders issued approximately US $152 billion in loan commitments to African sovereign borrowers and their state-owned enterprises. Official loans from Chinese institutions in Africa can be broadly classified into three categories:

• Zero-interest foreign aid loans: Interest-free loans offered by the China’s Ministry of Commerce are among the most common loans to be cancelled and are often looked at as grants.
• Concessional loans: This specific loan instrument, issued only by China Eximbank, offers a five-year grace period and a 15-year repayment period at 2 percent, generally. Concessional loans are usually denominated in CNY and do not require the borrower to pay part of the project cost up front.
• Commercial loans: This is the most common Chinese loan issued in Africa. Terms are comparable to the market rate (typically LIBOR + 2.0 to 4.0 percent).

African debt relief at a standstill

Over the summer, negotiations at the G20 between the international community, official creditors, and multilateral development banks have proven remarkably unproductive. Private creditors still reject nearly all proposed forms of relief, and China, for the most part, remains vigilantly quiet. According to an article by Deborah Brautigam published in The Diplomat, China, the World Bank, and African Debt: A War of Words, the World Bank not only resisted calls from the G20 to participate in the Debt Service Suspension Initiative but has also publicly singled out the China Development Bank for their lack of participation in the initiative. These remarks directed at China by World Bank President David Malpass added a political dimension to the DSSI effort reminiscent of the rising hostility between the United States and China.

Nearly all the recipients of debt relief through the DSSI have subsequently experienced downward revisions of their sovereign credit ratings by international credit rating agencies. African governments that would otherwise request debt relief, but fear limiting their access to capital in the future, are now in a bind.

In a recent article, Cobus van Staden, a senior foreign policy researcher at the South African Institute of International Affairs and co-founder of the China Africa Project, suggests that for the rich countries of the world, the cost of helping Africa with debt relief is now far cheaper than doing nothing at all. Staden’s article sheds light on the fact that Africa—with a population of roughly 1.2 billion, a mean age of 19­­, and dwindling economic opportunities—is, from a national security standpoint, likely to become a hotbed for militant radicalization. Furthermore, he warns that if African economies were to collapse, Europe would undoubtedly face an unprecedented wave of migration dwarfing that of 2015.

While this situation is still unfolding, this analysis attempts to speak to the complexity at the heart of my summer research as an intern at EMI. With the encouragement of EMI’s directors, I’ll expand on my summer research in my honors thesis, delving deeper into Angola’s health expenditure-to-debt service spending patterns in the midst of the ongoing African debt crisis.