EMs still in A&E post-pandemic

ESG+ Matters

EMs still in A&E post-pandemic

Eileen Gavin - 13 September 2022

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As the IMF edges closer towards emergency financing deals with the likes of Sri Lanka, Pakistan, Zambia and Egypt, is it time for investors to take a fresh look at EMs?

Against expectations, could it be that Western multilaterals, regional development banks - and China - have (just about) managed to avert a post-pandemic wave of EM sovereign defaults on the heels of Zambia and Sri Lanka?

Having approved a record SDR allocation for EMs equivalent to USD257 billion in August 2021 in order to boost liquidity, and agreeing a new USD44 billion mega-deal for serial defaulter Argentina in March last, the IMF on 31 August greenlighted a USD1.3 billion 38-month Extended Credit Facility (ECF) for Zambia, after China committed to providing concessions under the G20 Common Framework put in place during the pandemic. An early casualty of the pandemic, Zambia defaulted on some USD17.3 billion in December 2020.

This new deal for Zambia follows other facilities for Sri Lanka and Pakistan, with another for Egypt still in the works. The Fund also latterly approved a large USD18.5 billion flexible credit line for former market darling Chile (which the central bank will treat as precautionary). 

The question for investors now is whether these bailouts will be enough to put a floor under EM sovereigns. With the ECF in-hand, Zambia's immediate priority will be to secure a quick restructuring with private creditors, who will be asked to make concessions, either by agreeing to write-downs or extending loan terms.

But first, as our Africa Analyst Aleix Montana notes, Western bondholders will want to properly understand the finer details of China’s terms and conditions.

China’s approach to EM debt remains opaque

Notwithstanding the IMF/G-20 umbrella, Western creditors will remain concerned that their Chinese counterparts could still be given preferential treatment. And while Western bondholders will likely wipe part of their loans, Beijing's lending history suggests that Chinese creditors will prefer to extend repayment terms instead – meaning continuing pressure on the sovereign down the line. 

Certainly, China’s next steps in the Zambian process will be a key indicator of Beijing’s approach to highly indebted countries seeking debt relief under the G20 framework. Chad and Ethiopia also applied to the framework, but negotiations have stagnated. 

Weak EM governance is also problematic – for China as well as the West

In all of this, we would reiterate the main finding of our Q3 Sovereign Ratings - which flagged up continuing EM governance problems as having the potential to undermine the effectiveness of these financial bailouts and, in turn, weigh on bondholder confidence.

China’s Foreign Minister, Wang Yi, in mid-August announced that Beijing would forgive 23 interest-free loans to 17 African countries and redirect USD10 billion of its IMF Fund reserves to the region.

Absent any details, the assumption is that, as on previous occasions, this debt forgiveness will be limited to mature, foreign-aid loans, but not the (interest-paying) concessional and commercial loans that now constitute the vast bulk of China’s lending to Africa, Asia and Latin America. 

While some of these concessional and commercial loans have been restructured, China has also latterly doled out a string of opaque ‘emergency loans’ for distressed sovereigns including Sri Lanka and Pakistan– apparently without much in the way of the usual conditions required by the IMF and Western lenders, leading to concern that serious structural fiscal and debt problems are merely being kicked down the road, storing up even bigger problems for later (including social).

Sri Lanka – with fully 10% (USD3.5 billion) of its outstanding debt held by China – being a case in point.

Arguably, Beijing too needs to pay more attention to the G in Sovereign ESG moving forward.


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