Brian Caplen blog 2016

Not all low-income nations are impressed with the G20’s pandemic initiative on debt. Many think they can do better raising money from the markets.

Amidst fears of the toll the pandemic would take on the poorest countries, the G20 launched in April its Debt Service Suspension Initiative (DSSI) offering temporary suspension of official government-to-government debt repayments to 73 low-income countries. The initiative was then extended for six months in October ensuring that it runs until the end of June 2021.

But up until now a large 40% or so of eligible countries have not applied for DSSI provoking questions as to how effective such schemes are and whether the reputational downside of participating outweighs the limited gains that come from merely deferring payments rather than writing off debt entirely.

With interest rates at record lows now is the time for African and other emerging countries to be borrowing and investing more rather than less

For sovereigns which borrow commercially applying for DSSI brings with it the fear of losing market access. Banks and the private sector have so far resisted demands to come on board and, even if they did, deferring payments would likely constitute a technical default with all the opprobrium involved for borrowers.

Aid charities have been vocal in their calls for more debt relief across the board but in the investment community there are those who make the contrary argument that with interest rates at record lows now is the time for African and other emerging countries to be borrowing and investing more rather than less.

Emerging market specialist Renaissance Capital said in a recent report that based on falling bond yields, emerging markets could add 60% of GDP to existing debt with no increase in servicing costs if interest rates drop by as little as 150 basis points.

While accepting that currency risk is an issue if borrowing is done in foreign currencies, the Renaissance Capital report argued: “We think an exciting opportunity (and of course, risk) beckons. Governments in FM [frontier markets] might be able to borrow at 4-6% in the 2020s, which (crucially) if they are invested well, could lift real growth by providing essential infrastructure to allow industrialisation.”

Of course the final outcome depends crucially on this last point – how well will the funds be invested. But it’s worth noting that in the IMF’s forecasts for 2020 growth, among the small group of countries (about 25) that will record positive growth are many of the same names appearing on the DSSI list. This doesn’t mean they are not poor but it does mean they have upside potential which may be better realised by fostering capital inflows rather than suspension of debt repayments.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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