African Eurobond Issuers, Not All About Default
(4 min read)
- African Sovereign Eurobonds have lagged the broader EM rally
- Debt sustainability must be assessed on a country-by-country basis
- Transparency and financial innovation are key for creditors and debtors
- New instruments are needed to respond to the crisis
A recent article argued that debt forgiveness for many African governments is inevitable. Investors remain reluctant, too. Since the height of the Covid-induced sell-off in March, most financial assets have experienced a remarkable recovery. The spread of JP Morgan’s Emerging Markets Bond Index Global Diversified has narrowed by more than 300 bp to about 420 bp.
Africa stands out as an underperformer. The spread over the broad index remains at an elevated level relative to the past ten years – a period in which the African complex has more than doubled its index weight. Many African governments seized the opportunity of low global interest rates by issuing Eurobonds. The current crisis now turns out as the first litmus test for the ‘new kids on the block’. Covid-19 is putting pressure on comparatively weak healthcare systems and exhausts the oftentimes already limited fiscal space. But some countries are better prepared than others to withstand the storm. While debt metrics in the region have generally deteriorated, there are significant differences across countries. A clear-cut answer to the question on whether debt is sustainable does not exist. Consequentially, haircuts on Eurobonds to potentially restore debt sustainability or create urgently needed fiscal space are, in the majority of cases, not the appropriate means.
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