Private creditor debt relief for Africa may be long-term positive -rating agency

Private sector involvement in a debt relief scheme for African countries could prove positive in the long-run if it encourages investment and bolsters debt sustainability, Scope Ratings said in a report on Thursday. Ivory Coast, Angola and Ethiopia are among those to sign up to an initiative offered by official creditors, including the G20, China and the Paris Club to freeze debt service payments owed by the poorest nations through year-end to free up funds to fight the coronavirus outbreak and offset its economic pain.

But private creditors have yet to join the scheme, with some governments expressing reservations that involving the private sector could risk a default and damage their access to debt capital markets. Similarly to other rating agencies, Scope noted private sector involvement in any debt delay could be considered an event of sovereign default under its methodology. However, it said any default rating would likely be transitory. “Longer term, involvement of private sector creditors in debt relief initiatives could be viewed as credit positive if suspension of interest and principal payments facilitates short-run investment and bolster debt sustainability long term,” Scope’s analysts said in a report.

Such benefits would be particularly clear were solvency issues to be eased via the write-off of principal debt in countries with significant private sector debts. Government’s long-term market access and credit rating may benefit where combined official and private sector debt suspension or relief improves prospects for economic growth and debt sustainability, Scope said. But it warned the structure of any debt exchange or restructuring was key. “If a suspension of 2020 bond coupon and principal payments leads to a short-run credit event followed by a significant debt service hump in future years, this could be considered credit negative even post-debt restructuring,” the analysts added.

Reuters