Fitch warns Africa risks falling back into financial ‘distress’

Sub-Saharan African states have borrowed so much money since the debt forgiveness
programmes earlier this century that they risk falling back into financial distress, Fitch warned today.

However, the rating agency argued that multilateral debt relief had not been squandered, as some have argued, because it has “delivered lasting benefits” in the form of faster economic growth and improvements in measures of human development.

Between 2001 and 2015, 36 states, all but six in Africa, had $76bn of debt wiped off as part of the Heavily Indebted Poor Countries and Multilateral Debt Relief Initiatives. And although some poorly-run countries wasted this windfall, Ed Parker, head of Emea sovereign ratings at Fitch, said “median GDP growth, total investment-to-GDP and countries’ percentile ranking in the UN’s Human Development Index all improved for Fitch-rated subSaharan sovereigns after they passed the HIPC completion point relative to pre-HIPC, and also improved relative to sovereigns that have not benefited from the HIPC initiative”.

The UN’s HDI is a measure of health, education and general living standards. Difficult choices now face many of the countries that received debt relief, however, after a ballooning of sovereign debt.

The median public debt-to-GDP ratio of the 19 sub-Saharan countries rated by Fitch plummeted to just 26.7 per cent in 2012, as a result of the wave of debt forgiveness. However, it has since rebounded to 54.3 per cent as many countries have taken advantage of the fiscal space opened up by debt relief to run larger primary deficits.

This trend has been exacerbated by the impact of a slide in commodity prices from 2014 onward
and weaker currencies in countries with high levels of foreign currency denominated debt.

In terms of debt-to-government revenues, a measure many view as more relevant, the rebound has been equally stark, from a low of 130 per cent in 2008 to 277 per cent, as shown in the first chart.

As for the cost of repaying that debt, the proportion of Fitch-rated sub-Saharan states with elevated debt service as a share of government revenues is back where it was before the start of the HIPC debt relief initiative in the early 2000s, in part because less of the debt is concessional now, illustrated in the second chart.