• The G20 countries (including China) have extended their support to low-income countries most affected by the impact of the coronavirus disease 2019 (COVID-19) on 13 November 2020 and approved a historic common framework which will allow for the restructuring of government debt deemed unsustainable. This debt initiative will be in addition to the temporary external-debt freeze extension under the G-20 Debt Service Suspension Initiative (DSSI), which will end on 30 June 2021.
• Private creditors are urged to participate in this initiative, but it remains on a voluntary basis.
• On 28 September, the IMF approved a six-month extension of the temporary increase in the access limits of emerging financing instruments. The Rapid Financing Instrument (RFI) is available to all member countries, while the Rapid Credit Facility (RCF) is available to low-income countries eligible for concessional borrowing. The increase in access limits will apply until 6 April 2021.
• On 18 November, Mohammed al-Jadaan, the finance minister of Saudi Arabia, which holds the G20 presidency this year expressed his confidence that the group of nations and the IMF could soon agree on a new allocation of the fund's special drawing rights (SDRs). "The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves," per IMF definition. During the 2008 global financial crisis the IMF issued an additional USD270 billion in SDRs to mitigate the impact of the financial sector fall-out.

The latest debt initiatives by the IMF and G-20 follow in the wake of the Zambian government's default on its external interest payment on 13 November. Zambia became the first country in the sub-Saharan African region to default on its external debt obligations due to coronavirus disease 2019 (COVID-19)-pandemic-related fiscal pressures. This follows the 30-day grace period for a USD42.5-million coupon payment on a Zambian bond that expired on 13 November. On 20 October, the Zambian authorities approached bondholders to freeze debt obligations on three Eurobonds. Uncertainty over how Chinese private creditors will be treated, the release of a relatively scant 2021 national budget ahead of national elections scheduled for next year, and lack of a comprehensive International Monetary Fund (IMF) financially supported programme that could result in debt sustainability over the medium term resulted in an unfavourable outcome at the bondholders' negotiations. As a result, IHS Markit has downgraded Zambia's short- and medium-term sovereign risk ratings to 70/100 (CC+ on the generic scale) and left the outlook unchanged at Negative. The Negative outlook reflects the risk of a further downgrade of IHS Markit's medium-term sovereign risk rating to 75/100 (C on the generic scale), in the Default - Accumulating Interest Arrears category.

Zambia's strong reliance on net foreign direct investment (FDI) and portfolio inflows as sources of current-account financing leaves the country's short- and medium-term sovereign risk ratings highly vulnerable to changing investor sentiment in the global and local market. The government's fast-paced debt-financed public-sector investment programme pushed up the external-debt-to-GDP ratio to 117.5% at the end of 2019, while debt-servicing costs took up a larger share of the country's foreign-exchange earnings - 39.4% of total foreign-exchange earnings at end-2019. By the end of 2019, Zambia's import cover ratio fell to 2.2 months of imports of goods and services, while net FDI and portfolio inflows turned negative. Adverse weather conditions, lower global copper prices, and ongoing electricity disruptions, combined with the government's unwillingness to access concessional financing under an IMF support programme, added to Zambia's external debt predicament. The Zambian authorities have been reluctant to unlock further IMF support over the conditions of fiscal consolidation, a lighter subsidy burden, and commitment to business policy reforms. This left Zambia excluded from recent IMF emergency funding under the RCF.

Other countries such as Angola with precarious external debt levels were able to unlock financial assistance from the IMF following favourable progress under an IMF Extended Credit Facility (ECF). The financial safety net provided by the IMF and G-20 countries during the first half of 2021 will in IHS Markit's view continue to advert a debt crisis in the region and benefit those countries in good standing with the IMF.

The outlook for post-2021 could become more difficult as these financial support channels closes. A shift towards fiscal consolidation and growth enhancing policies will become more pertinent, in IHS Markit's view.

Posted 04 December 2020 by Thea Fourie, Director, Economics, S&P Global Market Intelligence