The IMF and World Bank issued a joint statement to the G20 yesterday calling for the official sector to provide debt relief to the world's poorest countries. Specifically, the Call to Action seeks that all official bilateral creditors suspend debt payments from certain poor countries that request forbearance in order to help them address their immediate liquidity needs arising from the Covid-19 pandemic.
We think this could have important implications for bondholders (and other lenders) too. Indeed, the joint statement hopes this will send a "strong signal to financial markets". Out of the 76 IDA-eligible countries targeted by this Call to Action, we reckon that 22 have international bonds outstanding, with just over half of them in Sub Sahara Africa, amounting to a total stock of nearly US$60bn. On the one hand, a suspension of debt payments owed to official creditors will provide more fiscal space to pay bondholders. But we do not think that is the intention. The Paris Club principle of comparability, or even just moral suasion, would suggest bondholders need to do the same. This could involve temporary interest relief (flow relief) or deferment of principal where appropriate on a case-by-case basis.
There are a few things to note.
First, the poorest countries are defined as those that are IDA-eligible under the World Bank's classification. There are 76 IDA-eligible countries. These are generally countries with a per capita income (GNI basis) below a threshold – US$1,175 currently – and which are therefore eligible for concessional lending.
Second, the call is to all official bilateral creditors. Hence, we take this to mean that it is directed not just at Paris Club creditors, but non-Paris Club too, and we suspect is no doubt aimed at China, which has emerged as a significant lender to emerging markets and especially low income countries over the past decade. Specifically, this is a global effort and Paris Club creditors would not want other official bilateral lenders to free ride on any debt relief it grants.
Third, the call is for immediate effect. The IMF/WB will seek endorsement of the proposal at the forthcoming Spring Meetings (next month). We will see if this is endorsed by G20 leaders, who are meeting today.
Fourth, the provision of official sector debt relief appears to be at the request of eligible countries, rather than being automatic. So it appears it could be operated on a case-by-case approach. The human cost of the Covid-19 pandemic – and associated economic and market impact – will vary by country and each country's economic situation and liquidity needs will differ. Indeed, some countries currently have been hit more by the global economic impact (the fall in global trader, lower commodity prices, rising country spreads, if they have bonds, and weaker exchange rates), than directly by the incidence of Covid-19 infections. And some countries – those with market access perhaps – might be concerned about the impact of seeking debt relief on their own credit ratings and market reputations (we recall, albeit in totally different circumstances, that a few countries declined HIPC treatment even though they might have been eligible). But for those countries that request forbearance, the IMF/World Bank will make assessments of the crisis impact and financing needs, including identifying those with unsustainable debt situations and debt relief needs. Of course, some of these countries will already be classified as having an unsustainable debt position, or at high risk of debt distress (eg Ghana, Zambia), according to the IMF's pre-existing DSA assessments.
What might this mean for bondholders?
We think there are 22 countries with international bonds outstanding out of the 71 IDA-eligible countries (see table). Their total stock of bonds amounts to US$58.4bn, with annual interest payment of cUS$4.2bn – although just five counties (Nigeria, Ghana, Cote d'Ivoire, Kenya and Pakistan) make up around two-thirds of their collective debt. And they are not an homogeneous group. It includes poor countries such as Ethiopia, Mozambique and Tajikistan; Uzbekistan with high savings and reserve buffers; some with bond maturities due this year or next; some with single small bond issues and hence low interest payments in the near term; and others that may not be seen by the market as especially reliant on concessional financing by having numerous bonds outstanding and therefore with reputations they may want to protect (eg Ghana, Nigeria, Cote d'Ivoire, Kenya, Pakistan, Senegal). Hence, the IDA group may be seen as too wide in some sense. If, instead, we seek to narrow it down by focusing only on those IDA countries with bonds outstanding but without Blend status (ie even more reliant on concessional finance), that only leaves seven countries for instance.
Moreover, markets may be concerned that some countries treat this approach opportunistically to avoid payments to mask previous policy weakness (Zambia?). And other (higher income) countries are not on the list –such as Angola and Ecuador, two countries seen as among the most vulnerable to a balance of payments crisis (of course, Ecuador has already announced a temporary suspension of upcoming interest payments on certain bonds).