Most emerging economies, which have been struggling with deteriorating public finances since 2010, have seen this situation worsen with the Covid-19 crisis (see BSI Economics Minute). While the vast majority of countries have managed to overcome the liquidity crisis, risks remain and threaten both governments and their creditors.
Since the start of the health crisis, Argentina, Ecuador, Lebanon, and Zambia have already defaulted on their public debt. While initiatives currently underway (ISSD, allocation of new Special Drawing Rights) could provide liquidity to emerging countries and thus limit the risk of a domino effect, the restructuring of certain countries’ public debt seems inevitable.
These restructurings pose significant challenges, as they are highly complex operations. This raises two questions: who should be restructured? And how should they be restructured?
In this first post, we will look at who the external creditors of governments are, how much influence they have, and what is at stake.
Creditors of public and publicly guaranteed (PPG) external debt
There are three main categories of external creditors:
- Bilateral (states, export credit agencies);
- Multilateral (International Monetary Fund, World Bank, etc.); and
- Private (private financial institutions, companies).
The first two (official creditors) generally offer credit solutions on more favorable terms (lower interest rates, longer maturities) than private creditors. As part of the major public debt restructuring movement in sub-Saharan Africa during the 2000s, it was these creditors who were approached (public debt fell on average from 66% of GDP in 2000 to 24% in 2008).
Between 2006 and 2019, the share of these creditors in the GPP external debt structure tended to change. For emerging countries with a so-called speculative sovereign rating[1], the average share of multilateral creditors fell from 45% of the total in 2006 to 33% in 2019, while that of bilateral creditors increased from 22% to 28% and that of private creditors from 33% to 39%..
This change can be explained by the fact that when multilateral creditors grant loans, these are generally accompanied by conditions on the implementation of reforms, which are sometimes restrictive, whereas private creditors do not impose such conditions directly. As a result, a gradual shift towards this type of creditor has been observed. Since 2010, new bilateral creditors that are not members of the Paris Club have also gained in importance (China, Gulf countries), but with debt conditions that are sometimes opaque.
What are the implications of this change in the structure of creditors?
This development is significant because, in the event of restructuring, it is sometimes more difficult to involve private creditors. At this stage, private creditors are not participating (or are participating only to a limited extent) in recent debt relief initiatives (ISSD). However, their participation seems inevitable for effective restructuring. Furthermore, countries would not necessarily be in favor of restructuring these creditors. In the short term, they fear that this could lead to a downgrade of their sovereign rating; in the long term, a default tends to send a negative signal, which generally results in higher risk premiums.
Furthermore, the high level of opacity surrounding the contours of bilateral debt with certain countries may raise issues of fairness in the treatment of creditors. Although China has now entered into negotiations alongside the Paris Club,the lack of transparency will continue to make it difficult to restructure bilateral debt.
A group of countries at risk
While data on debt to China remains difficult to use, data from Johns Hopkins Universityand Aidata highlight the heavy dependence of several countries (Angola, Congo, Ethiopia, Senegal, DRC, Zambia) on this single creditor.
In Figure 1, the countries at the top had a high level of external GNI debt as a percentage of GDP in 2019 (i.e., a potentially significant level of risk, even before the COVID-19 crisis). The further to the right a country is located, the higher the share of non-official creditors in total external GNI debt, which could potentially lead to significant difficulties in restructuring predominantly private creditors.
In Figure 2, the logic is similar, this time concerning PPG external debt service[2] for 2022, according to the World Bank. This approach makes it possible to identify countries that will face high debt service (at the top) and for which an increase in external public financing needs could lead to liquidity or even solvency risks. This situation is all the more worrying when these amounts are owed to non-official creditors (right).
Based on these data alone, the most vulnerable countries and those potentially subject to more delicate restructuring, given the significant share of private creditors, are: Angola, Cape Verde, Ecuador, Jamaica, Jordan, Mongolia, Mozambique, Sri Lanka, Tunisia, and Zambia.
Different types of creditors imply different forms of debt. This point will be addressed in a second BSI Economics article: « How to restructure? » This second article will complement the first and provide a better understanding of the other issues surrounding the restructuring of emerging countries’ public debt.
Article co-authored by Victor Lequillerier, Leila Menane, and Lina Bourassi
