Moritz Kraemer’s article, Markets Insight (January 19), rejects the suggestion that the downgrading of African sovereign Eurobonds is evidence of anti-African bias. On the contrary, Kraemer argues, credit rating agencies have given ratings that are too generous, as evidenced by figures showing that the default rate of B-rated African countries has historically been well above the global average.
But the data he presents to support this claim is spotty. African countries do not have a long history of ratings or even market access and, in any case, this does not explain why African countries systematically have to pay more for their debt than Latin American countries. with similar or more risky profiles.
But where he is right is that criticizing rating agencies will not help solve the debt crisis affecting more than half of sub-Saharan Africa’s low-income economies.
The seriousness of the situation cannot be overstated. These countries spend on average 31 percent of their income on debt servicing. This leaves little room for development spending once recurring expenses are taken into account. As a result, gains in the fight against poverty are rapidly eroding. The World Bank projects that across sub-Saharan Africa, gross domestic product per capita, which has not increased since 2015, will decline at an average annual rate of 0.1 percent over the 10 years to 2025, when the number of people living in absolute poverty will have reached 472 million, or 37 percent of the region’s population.
To remedy this situation, it will take more than the current package of half-measures aimed at solving the liquidity problem of countries with market access. The debt crisis in Africa is also a solvency crisis which has consequences for development. What is needed is a comprehensive approach: the equivalent of the Heavily Indebted Poor Countries (HIPC) initiative, launched by the World Bank and the IMF in 1996 to ensure that no poor country is faced with an unmanageable debt burden.
But safeguards must be put in place to deal with the moral risk represented by debt cancellation. Greater attention should also be paid to reforming the Common Framework – the G20 mechanism for dealing with protracted insolvency and liquidity problems – to facilitate orderly and faster debt restructuring of countries with market access that would need it.
Director, Capital Markets, FSD Africa