Angola/Mozambique: China debt relief helps – Fitch Ratings

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Angola/Mozambique: China debt relief helps – Fitch Ratings

6:23 CAT | 26 Jun 2020

in file CoM

Financial agency Fitch Ratings on Thursday said that the financial relief promised by China last week to countries such as Angola and Mozambique would ease liquidity pressure, but it should vary by country.

“Debt relief may ease short-term liquidity pressures, particularly for countries that have substantial debt linked to Chinese entities and for which there are payments this year,” the note said, in which it warns that “the terms and impact of China’s debt relief should vary by country.

On Monday, Angolan economic newspaper Expansão reported that Angola had agreed on a deferral of debt payments of US$21.7 billion (€19.3 billion) with China, but there was no official confirmation from the government led by João Lourenço.

“In line with the Debt Service Suspension Initiative (DSSI), the Chinese president, Xi Jinping, in a speech at the China-Africa Cooperation Forum (FOCAC), indicated that Chinese financial institutions should meet with African countries to outline agreements on loans with sovereign guarantees, which Fitch sees as official bilateral debt”, he added in the comment.

China, Fitch noted, “is participating for the first time in a coordinated, multilateral and global debt relief action,” and holds 25% of the external debt of DSSI eligible countries, according to figures presented in May by the International Financial Institute, which has led negotiations for debt relief on the side of private creditors.

Among the countries that have a significant share of external debt to China and are eligible for DSSI, Fitch lists the Portuguese-speaking countries Angola and Mozambique, as well as others such as Kenya, the Maldives, Ethiopia, Cameroon, Pakistan, Laos and Zambia, and points out that the terms and conditions may be better than those presented under the G20 DSSI.

In commenting on the Chinese President’s announcement, Fitch Ratings recalled that China has already renegotiated the debt of some countries, such as Mozambique in 2017.

In the note, Fitch says it will “take into account the prospects and impact of debt relief by official bilateral creditors, including China, when assessing the liquidity pressures and debt sustainability of sovereign countries” and clarifies that the impact on the rating is not immediate.

The Fitch Ratings report comes at the same time that the United Nations Economic Commission for Africa (UNECA) has been holding meetings with African finance ministers, following the public discussion that has been taking place on how governments can honour their commitments and at the same time invest in the spending needed to contain the covid-19 pandemic.

The assumption of the debt problem as a central issue for African governments was well reflected in the concern that the IMF and the World Bank devoted to this issue during the Annual Meetings held in April in Washington, where they made funds available and agreed on a moratorium on paying the debts of the most vulnerable countries to these institutions.

On April 15, the G20, the group of the 20 most industrialized nations, also agreed to a suspension of 20 billion dollars, about 18.2 million euros, in bilateral debt for the poorest countries, many of which are African, by the end of the year, challenging private creditors to join the initiative.

Moody’s is the only of the three largest financial rating agencies that considers adherence to bilateral debt relief for G20 countries to be sufficient reason to put that country’s rating under review for a downgrade, which led UNECA Secretary General Vera Swonge to say that “no African country” will fail to pay debt to commercial and private creditors.

The UNECA, among other institutions, is designing a plan to swap countries’ sovereign debt for new concessional bonds that could prevent the funds needed to fight covid-19 from being used to pay creditors.

This financial mechanism would be guaranteed by a multilateral bank with a triple A rating, the highest, or by a central bank, which would convert the current debt into securities with a longer maturity, benefiting from five years of exemption from payments and lower coupons (interest payments), according to the UNECA.

Source: Lusa