African coronavirus cases will soon reach the one million mark based on the current trajectory of fast rising community transmissions. Prevalent economic optimism and hopes for a recovery next year seem unfounded as budget deficits spiral and new debt obligations balloon. Without further budgetary support, some of Africa’s largest economies are set to default on loan obligations in the coming year.

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The African continent is set to record one million confirmed novel coronavirus cases in the coming week, as infections spike since national lockdowns were gradually phased out in June. South Africa, the continent’s most industrialised economy, currently accounts for more than half of Africa’s total cases and 60 percent of new cases due to rapid community transmissions in impoverished urban slums and densely populated townships. The country now has the fifth highest number of COVID-19 infections in the world, even though its population is far smaller than other countries in the top five ranking such as India and Brazil. The precedent set in South Africa bodes ominously for many other African countries as the continent steers into its predicted peak over the coming two months.

Some initial enthusiasm over Africa’s low death rate has subsided as reports of mysterious deaths and secret mass graves in West and East Africa have become more frequent. New data released by the South African Medical Research Council shows that South Africa witnessed some 17,000 extra deaths from natural causes or 59 percent more than would normally be expected between early May and mid-July, suggesting many more people are dying of COVID-19 than shown in official figures. This indicates that the death toll is likely to be far higher than reported, with some scientists speculating that Africa’s death toll could be four or five times higher than the current number of less than 18,000 deaths.

The implications of an uncontrollable surge in coronavirus cases bodes ominously for the prospect of a swift economic rebound in 2021 and dashes the hopes of many economists for a so-called ‘V-shaped’ recovery next year. The implications for trade, exports, and other foreign exchange generating, sectors such as tourism, are dire as long as infections continue to spike and the threat of a multiple waves of infections looms. African finance ministers seem blind to the potential threat to their economies and many governments have committed to further unfunded spending on infrastructure projects which will balloon their budget deficits and mount the debt burden to unsustainable levels. Rather than a rebound in economic performance, Africa is likely to witness a spree of defaults on external loans over the next year, even if so-far meagre debt relief initiatives are expanded and extended.

COVID-19 in South Africa: Shape of things to come?

South African President Cyril Ramaphosa implemented one of the world’s toughest lockdowns at the end of March, which was gradually lifted in June (See SPECIAL REPORT: HOW TO REOPEN AFRICA’S ECONOMIES?). Movement restrictions and a night-time curfew remain in place, while the government still prohibits the sale of tobacco and alcohol, and schools have again been closed under labour union pressure. However, rising unemployment, poverty, and malnutrition have forced the government to reopen most of the country’s economy, which has translated in a spike in coronavirus cases. COVID-19 infections are increasing by more than 10,000 per day and the current total will soon approach 500,000. The high number of cases relative to other African countries is partly due to much more extensive testing capacity, yet it also serves as a warning for the shape of things to come for the rest of the continent.

Impoverished and crowded urban areas in South Africa have become a hotspot for the disease, particularly in the commercial hub of Gauteng, which includes three major cities with a total population of 15.5 million people, and the Western and Eastern Cape provinces. The National Health Laboratory Service has become overwhelmed, which has created a backlog in testing and stalled the government’s much-lauded virus tracing strategy, while capacity at major hospitals in the country’s largest city of Johannesburg is completely overstretched. Several large pharmaceutical companies are being sued over contract compliance for undersupplying COVID-19 testing kits. This chaotic state has undermined confidence in the government’s strategy to combat the virus (See SPECIAL REPORT: THE ‘BATTLE’ FOR SOUTH AFRICA).

Up to 50,000 people are expected to die from the virus in South Africa, which has become more of a reality following the release of the new data by the South African Medical Research Council. Health Minister Zweli Mkhize says that the excess fatality numbers are comparable to other countries and much lower than some countries such as the UK. Regardless, the low death rate of 1.5 percent recorded so far now seems erroneous and not reflective of the result of years of neglect, mismanagement, and corruption in the South African public healthcare sector. Meanwhile, violent protests, riots, and general insecurity, including the risk of armed crime, are becoming more widespread and frequent as the economy falters and security forces struggle to maintain law and order. Far less developed and poorer African countries are taking heed.

Over-optimistic economic forecasts

Based on the current trajectory of fast rising coronavirus infections, and the possibility of a much higher death toll than recorded so far, the probability of a swift economic recovery for Africa in 2021 is becoming less likely. The International Monetary Fund (IMF) now forecasts an annual recession of minus 2.8 percent in sub-Saharan Africa this year, while The World Bank predicts a contraction of 3.2 percent in 2020. This is based on the disruption of economic activity caused by this year’s lockdowns, while daily cases of coronavirus are still rising, unlike in many developed countries that have started to show signs of recovery. Africa’s external and fiscal buffers are therefore still being substantially eroded. The stimulus measures made by sub-Saharan African governments are, at 3.4 percent of GDP on average, easily the lowest in the world.

The region’s two largest economies, Nigeria and South Africa, are set to contract by 3.7 percent and 8 percent respectively this year. Kenya, which is East Africa’s biggest economy, is expected to not grow at all in 2020, down from an average of 6 percent annual growth over the past decade. Despite lower global demand for oil, Ghana is still set to record almost 2 percent economic growth this year. This pattern is not being replicated in other oil producers like Angola, Gabon, Equatorial Guinea, and Republic of Congo, which face deep recessions. Ongoing coronavirus infections in Africa, as well as international travel restrictions and African border closures, will also temper the prospect of a recovery in the tourism sector by the end of this year. This does not bode well for countries that overwhelmingly depend on tourism to generate foreign exchange, such as Mauritius, Seychelles, Kenya, Morocco, and Egypt. Several countries, like Morocco, have re-imposed lockdowns on major cities or regions where the virus thrives.

However, African finance ministers remain confident of an economic recovery next year and are putting in place stimulus measures and cutting taxes, which are further deepening budget deficits across the region. In East Africa, the June budgets included an array of tax waivers, direct cash handouts, and cheap credit to businesses. Kenya has even allocated USD 2 billion for political legacy projects, including massive new infrastructure ventures. Such appropriations are usually unfunded, while African governments pledge to raise domestic revenue generation despite having some of the worst tax collection records in the world and a history of years of unmet tax revenue targets. Trade and income tax revenues are also set to fall due to the global pandemic, supply chain disruption, and reduced African trading volumes which are unlikely to recover by year end (See SPECIAL REPORT: AFRICA’S SUPPLY CHAIN UNDER PRESSURE).

Meanwhile, various governments are diverting funds from coronavirus relief to bail out state-owned enterprises, such as South Africa’s debt-laden utilities and Kenya’s long-unprofitable state air carrier. Few carriers in Africa have replicated the relative success of Ethiopian Airways by focussing on cargo and relief shipments. Its large competitors such as South African Airways and Kenya Airways will require massive bailouts or re-nationalisations funded by already tight taxpayers to prop up symbols of national pride. The International Civil Aviation Organisation projects that USD 20 billion would be needed to prevent carrier bankruptcies. However, there is growing opposition to such bailouts for a sector with little commercial value or job-making potential. Such spending commitments are also adding to mounting concerns over the sustainability of Africa’s debt.

Towards a spree of debt defaults

International efforts to alleviate Africa’s debt burden have remained uncoordinated, contradictory, and often uncommitted, as forecast in a series of reports by EXX Africa since the start of the pandemic (See SPECIAL REPORT: CONFUSION OVER DEBT RELIEF AS PRIVATE CREDITORS REJECT MORATORIUM). The major multilaterals, especially the IMF, World Bank, African development Bank (AfDB), and others, have taken the lead in approving emergency financing (See SPECIAL REPORT: MULTILATERALS TO THE RESCUE IN AFRICA). The IMF alone has committed almost USD 11 billion in emergency financing and debt relief for sub-Saharan Africa and USD 9 billion for North African countries, especially Egypt. In addition to the Fund’s USD 20 billion total funding for Africa, the World Bank, AfDB, and Group of Twenty’s (G20) countries have made separate sizable commitments. However, sub-Saharan Africa alone will require USD 110 billion this year – some reports say that another USD 44 billion will be needed to match a financing shortfall to avoid an economic and humanitarian calamity.

The main confusion and points of contention have arisen over debt relief proposals. The African Union (AU) and African finance ministers are still seeking debt relief worth USD 44 billion to plug the financing shortfall. In April, the G20 rolled out a much-trumpeted Debt Service Suspension Initiative (DSSI), yet the initiative has deferred just USD 6.58 billion of this year’s interest payments to next year. The AU wants these deferments to be expanded and extended beyond 2020. However, the G20 is unlikely to consider these proposals until the October Spring Meetings of the IMF and World Bank. Meanwhile, many African countries, such as Nigeria, Kenya, Uganda, and Togo, have also refused to sign up to the DSSI as the terms are too stringent and restrictive of future debt relief possibilities. Moreover, DSSI participation is being perceived as a default by major credit rating agencies, some of which have consistently downgraded any country that has committed to the DSSI.

The G20 has urged private creditors to match their proposal to allow the poorest nations to suspend debt payments for the rest of the year. However, private creditors, like those united in the Africa Private Creditor Working Group (AfricaPCWG), which includes large asset managers holding African debt, have warned that a one-size-fits-all solution would be counterproductive. Some 32 percent of total external debt and 55 percent of external debt service payments are estimated to be commercial. AfricaPCWG has refused to join the DSSI scheme and is negotiating debt relief individually with specific countries. Even though China has now joined the G20 initiative, it also negotiates debt restructuring on a bilateral basis, rather than using the G20 forum. The AU proposal to convert some of Africa’s debt into longer-term instruments in order to head off any risk of default has also failed to gain traction. The US government is unlikely to guarantee the new instrument, and instead G20 countries will wait for the October IMF and World Bank meetings to assure enhanced access for African countries to the Fund’s Special Drawing Rights.

Meanwhile, the major credit rating agencies are losing patience. Fitch has downgraded seven of the 19 sub-Saharan sovereigns it rates since March, while four sovereigns now have negative outlooks on their rating. The agency warns that African debt-to-GDP ratios will increase on average by 14 percent this year, which will undermine creditworthiness. However, Fitch does not believe that DSSI participation constitutes a default, since Issuer Default Ratings only refer to defaults on commercial debt. On the contrary, Moody’s, has placed Ethiopia, Cameroon, Senegal, and Côte d’Ivoire on review after these countries opted into the DSSI. All agencies remain concerned that sub-Saharan African government debt burdens are escalating at a faster pace than anywhere else in emerging markets. South Africa and Nigeria are tapping into domestic lending at higher cost than concessional financing, while Kenya and Côte d’Ivoire are still planning to issue Eurobonds before the end of 2020. Countries such as Zimbabwe, Sudan, Eritrea, Zambia, and Republic of Congo, remain firmly on EXX Africa’s Severe sovereign default category, while we also remain worried about the sovereign risk outlook of larger markets such as Egypt, South Africa, Kenya, and Nigeria.

INSIGHT

As Africa approaches one million coronavirus cases and the official death toll is questioned, the delay in reopening many economies will become a key concern and pose longer term debt sustainability questions. Africa’s biggest spike in Eurobond redemptions is not due until 2024-25, although several substantial principal payments on African sovereign debt fall due between 2020 and 2022. According to the latest available data, South Africa, Angola, Ghana, Kenya, Ethiopia, Nigeria, and Cote d’Ivoire have debt service obligations of more than USD 1 billion on public and publicly guaranteed external loans. These countries now have an immediate need to boost revenues, cut spending, and seek multilateral and other sources of financial support. However, each country requires a different solution to avoid loan defaults. For Nigeria, this means seeking more domestic revenues and relying heavily on multilaterals. Meanwhile, Kenya will need to seek a restructuring deal with Chinese lenders in order to avoid distress on its loan payments.

The continent’s external debt payments doubled from 2015 to 2017 to 11.8 percent. Debt-service obligations range from dollar-denominated Eurobonds and Chinese countertrade deals to bilateral project loans and trade credits, as well as obligations to the IMF and World Bank. Although the bulk of Africa’s debt is now owed to governments and multilateral institutions, the IMF will play a key arbiter role in the negotiations. Some countries like Mozambique, Zambia, and Republic of Congo have purposefully not disclosed massive opaque borrowings which has tarnished their creditor reputation. The US also opposes any debt relief for countries that have borrowed heavily from China.

Of Africa’s overall debts of around USD 365 billion, around a third is owed to China. China’s government, banks, and companies lent about USD 143 billion to Africa between 2000 and 2017, much of it for large-scale infrastructure projects. Chinese lending now dwarfs World Bank loans in Africa. China makes up 33 percent of external debt service in Kenya, 17 percent in Ethiopia and 10 percent in Nigeria. China refuses to deal within the IMF structure regarding its lending practices. Moreover, in contrast to 2005, when the issue was public debt, today 32 percent of total external debt and 55 percent of external debt service payments are estimated to be commercial. Also, unlike during global financial crisis in 2008-09, when Africa’s economies had larger buffers than now to protect against a downturn, this time round Africa has a more complex set of debt liabilities, including a higher proportion of commercial debt, less concessional debt, as well as substantial amounts of hidden or under-counted domestic obligations. As the prospect of coordinated debt relief fades, some of Africa’s largest economies are set to default later this year and beyond.

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