potential impact of the global financial crisis on sovereign debt of african countries matthias rau...
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Potential Impact of the Global Financial Crisis on Sovereign Debt of African Countries
Matthias Rau Göhring
Debt and Development Finance Branch UNCTAD
Washington, 24 April 2009 – African Trade and Debt in the Global Financial Crisis
Current World Economic Situation
• World GDP growth down to lowest level since WW II (-1.3 per cent in 2009)
• Negative per capita growth in Africa in 2009
– Even worse: It does not rebound quickly (estimate for 2010: 3.8 per cent)
• Full-blown financial and real economic crisis throughout the world
– For most African countries: No decoupling; no fiscal and monetary policy space
Impact on African Economies
• Dynamic effects due to – Rapid decline in trade flows– Decline in commodity prices– Reduced intermediate goods exports– Decreased access to finance for the corporate sector– Reduced remittances– Repatriated FDI earnings– ...
• There is contagion from the financial sector as well as from the real economic sector
Impact on African Economies (2)
• There is a high risk that achieved gains from prudent macroeconomic management, debt relief and official aid flows could be thwarted in many African countries
• Potentially serious implications on poverty eradication and MDG achievement– New World Bank (2009) estimates on potentially
dramatic increases in poverty and social vulnerability
Eradicate extreme
poverty and hunger
Achieve universal primary
education
Promote gender equality and empower
women
Reduce child
mortality
Improve maternal
health
Combat HIV/AIDS,
malaria and other
diseases
Ensure environmenta
l sustainability
Develop a global
partnership for development
Angola off trackon track, likely to be achieved
on track, likely to be achieved
possible if changes are made
possible if changes are made
possible if changes are made
possible if changes are made
insufficient information
Botswanapossible if changes are made
insufficient information
on track, likely to be achieved
possible if changes are made
possible if changes are made
on track, likely to be achieved
possible if changes are made
insufficient information
Kenya off trackon track, likely to be achieved
possible if changes are made
possible if changes are made
possible if changes are made
possible if changes are made
possible if changes are made
insufficient information
Lesotho off trackon track, likely to be achieved
off track off track off track off trackpossible if changes are made
insufficient information
Malawi off trackpossible if changes are made
possible if changes are made
possible if changes are made
off trackpossible if changes are made
off track insufficient information
Mozambiquepossible if changes are made
off track off trackon track, likely to be achieved
on track, likely to be achieved
off track off track insufficient information
Namibia insufficient information
possible if changes are made
possible if changes are made
off trackpossible if changes are made
insufficient information
insufficient information
insufficient information
Rwanda on track, likely to be achieved
insufficient information
on track, likely to be achieved
on track, likely to be achieved
on track, likely to be achieved
on track, likely to be achieved
on track, likely to be achieved
insufficient information
Swaziland off trackpossible if changes are made
possible if changes are made
off track off track off track insufficient information
insufficient information
Tanzania insufficient information
possible if changes are made
possible if changes are made
possible if changes are made
off trackon track, likely to be achieved
possible if changes are made
insufficient information
Uganda on track, likely to be achieved
on track, likely to be achieved
on track, likely to be achieved off track off track
possible if changes are made
possible if changes are made
insufficient information
Zambia on track, likely to be achieved
on track, likely to be achieved
on track, likely to be achieved
possible if changes are made
possible if changes are made
possible if changes are made
off track insufficient information
MDG
STATUS
Impact on Debt
• Easterley (99) showed: Growth implosions are a major cause for debt explosions
• External shocks on unprecented scale:
• Slump in export prices and export volume
• Bond market spreads multiplied
• Capital inflows dried up
• Debt ratios will deteriorate
African Debt SituationTotal External Debt Stock (% of GDP)
20
40
60
80
100
120
140
160
1990 1992 1994 1996 1998 2000 2002 2004 2006
ALL LDC Non-LDC
Source: UNCTAD secretariat calculations, based on World Bank, Global Development Finance; IMF, Balance of Payments; Economist Intelligence Unit database.
African Debt Situation (2)Total External Debt Stock (% of XGS)
40
80
120
160
200
240
280
320
360
400
440
480
520
560
1990 1992 1994 1996 1998 2000 2002 2004 2006
ALL LDC Non-LDC
Source: UNCTAD secretariat calculations, based on World Bank, Global Development Finance; IMF, Balance of Payments; Economist Intelligence Unit database.
African Debt Situation (3)Total Debt Service Paid (% of XGS)
(exluding Namibia)
0
10
20
30
40
50
1990 1992 1994 1996 1998 2000 2002 2004 2006
ALL LDC Non-LDC
Source: UNCTAD secretariat calculations, based on World Bank, Global Development Finance; IMF, Balance of Payments; Economist Intelligence Unit database.
African Debt Situation (4)Sovereign Risk Rating
Date Rating Outlook
Angola Jan-09 BB Negative
Botswana Jan-09 A Stable
Kenya Jan-09 CCC Negative
Lesotho Jan-09 … …
Malawi Jan-09 CCC Negative
Mozambique Jan-09 BB Stable
Namibia Jan-09 BBB Stable
Rwanda Jan-09 … …
Swaziland Jan-09 … …
Tanzania Jan-09 B Stable
Uganda Jan-09 BB Stable
Zambia Jan-09 B Negative
Zimbabwe Jan-09 D Stable
Source: Economist Intelligence Unit
African Debt Situation (5)
• Achieving long-term debt sustainability remains challenge, also in post-completion point HIPCs (see 2009 HIPC implementation report)
• Risk toward achieving debt sustainability due to low export bases/low degree of diversification of exports and resulting vulnerabilities to external shocks
• Current financial and economic crisis will have negative impact on debt ratios and debt dynamics
African Debt Situation (6)
2006 2007 2008 2009 2010-8
-6
-4
-2
0
2
4
Sub-Saharan Africa
Budget balance (% of GDP)Current account balance/GDP
Year
%
African Debt Situation (7)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
10
20
30
40
50
60Total Debt to GDP Ratio (SSA)
Year
%
Need for Responsible Lending and Borrowing
• Increasing interest in responsible lending and borrowing during recent years both from lender and borrower side
• Some donors have highlighted significance of building international consensus in this area
• Low- and lower middle-income countries have weak negotiating position vis-à-vis their creditors
• Resolution could be facilitated if lenders and borrowers could refer to agreed set of normative standards
Need for Responsible Lending and Borrowing (2)
• EURODAD already developed a proposal for sovereign lending standards
• Scope of UNCTAD’s project:• Develop internationally agreed guidelines and
criteria for assessing the legitimacy of debt contracts
• Supporting debt audits in selected countries
• Research and analysis on illegitimate debt issues
• Foster the development of a Structured International Debt Settlement (SIDS)
• Protection of sovereigns against vulture funds
Implications for Debt Management
• Effective debt management has rising importance, and is key in the current situation
• Continuous monitoring and frequent analyses of the debt portfolio is necessary
• Include domestic debt in debt portfolio analysis and DSA
• Asset-liability-, and cash-flow management are crucial for reducing liquidity risks
Policy Measures
• Sound macroeconomic policies conducted in the last years should not be abolished, but:
– There will be need for increased government spending on social protection, job creating programmes, and infrastructure
▪ There is only limited fiscal space; new financing should be grants or highly concessional
▪ Monetary policy actions should also be considered, but with caution
Policy Measures (2)
• The current DSF needs to be revised/enhanced: • Incorporation of domestic debt• Exterrnal shocks stemming from trade sector• Analysis of structure of debt• Inclusion of contingent liabilities
• Sustainability will not be achieved if lenders and borrowers are not prudent; => need for globally accepted standards for responsible lending and borrowing
Policy Measures (3)
• Need for a structured approach to resolving defaults and disputes between sovereigns, often referred to as Structured International Debt Settlements (SIDS)
• Internationally, short-term facilities with low conditionalities to support countries in current account problems are needed
Summary and Conclusions• International financial and economic crisis
will hit SSA developing countries more severely and longer lasting as initially expected
• African continent will have negative per-capita growth rates in 2009, making poverty reduction and MDG achievement almost impossible
• World leaders have just started w/ reforming the IFA. Need for more inclusive approach to the benefit of the poor
