G-20 debt freeze won’t fix medium-term debt challenges in frontier markets including SL: Moody’s

Wednesday, 20 May 2020 02:20 - - {{hitsCtrl.values.hits}}

Says most frontier market sovereigns are experiencing acute foreign exchange liquidity shortages
Warns liquidity relief from bilateral creditors will only partially offset immediate shock

The G-20 debt suspension initiative is unlikely to ease the significant credit challenges that the coronavirus pandemic has amplified in some frontier market sovereigns, particularly in Africa and South Asia including Sri Lanka, Moody’s Investors Service said in a report this week.

By lowering debt-service payments at a time when Government resources are limited and access to market financing is considerably constrained, the initiative will help to ease short-term liquidity pressures.

However, debt-service relief won’t have a significant impact on medium-term debt trends that have worsened during the crisis. Bilateral relief would only cover a fraction of the increased external funding gap resulting from the shock.

“While debt-service relief will allow some governments to reallocate scarce resources toward health and social spending, it will not have a significant impact on weaker medium-term debt trends,” said Moody’s Vice President – Senior Credit Officer and the report’s co-author Lucie Villa.

“The coronavirus shock will lead to sharply lower growth this year, wider budget deficits and higher debt burdens for at least the next few years, as well as higher borrowing costs, at least for debt contracted on commercial terms.”

“The prospect of significantly diminished revenue constraining debt-service capacity poses longer- term solvency challenges.”

The coronavirus shock and the authorities’ associated policy response have opened large fiscal and external imbalances that will take time to unwind. Low-income sovereigns entering the crisis with elevated debt burdens or exposure to foreign-currency risk are most vulnerable.

Moody’s estimates that the suspension of debt service payments could reduce the funding needs of eligible Moody’s-rated sovereigns by about $ 10 billion over the next eight months. This would only cover a fraction of the external gap, leaving an outstanding shortage of around $ 40 billion. New official sector disbursements are expected to help fill the gap, including emergency financing from the IMF.

“The size of the potential liquidity relief offered by this initiative varies between sovereigns, in proportion to their level of debt owed to official creditors. Each eligible sovereign’s decision to seek debt forbearance is likely to be in part a function of the immediate need for liquidity relief and the magnitude of potential relief on offer.”

“We estimate that Angola, Vietnam, Pakistan (B3 RUR-), Bangladesh (Ba3 stable), Sri Lanka (B2 RUR-) and Kenya have the highest debt-service payments to official creditors as a share of GDP, at between 1% and 4%. Significant external financing gaps would remain in Mozambique, Mongolia (B3 negative) and Cambodia, even if they participate in the initiative.”