Moody’s – G-20 debt freeze won’t fix eligible sovereigns’ liquidity pressures or medium-term debt challenges

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Most frontier market sovereigns are experiencing acute foreign-exchange liquidity shortages

» Liquidity relief from bilateral creditors will only partially offset the immediate shock

The G-20 debt suspension initiative is unlikely to ease the significant credit challenges which the coronavirus pandemic has amplified in some frontier market sovereigns, particularly in Africa, Moody’s Investors Service said in a report yesterday.

By lowering debt-service payments at a time when government resources are limited and access to market financing is considerably constrained, the initiative will help to ease short-term liquidity pressures.

However, debt-service relief won’t have a significant impact on medium-term debt trends that have worsened during the crisis. Bilateral relief will only cover a fraction of the increased external funding gap resulting from the shock.

“While debt-service relief will allow some governments to reallocate scarce resources toward health and social spending, it will not have a significant impact on weaker medium-term debt trends,” said Lucie Villa, a Moody’s Vice President/Senior Credit Officer and the report’s co-author.

“The coronavirus shock will lead to sharply lower growth this year, wider budget deficits and higher debt burdens for at least the next few years – as well as higher borrowing costs, at least for debt contracted on commercial terms.

“The prospect of significantly diminished revenue constraining debt-service capacity poses longer-term solvency challenges.”

The coronavirus shock and the authorities’ associated policy responses have opened large fiscal and external imbalances which will take time to unwind. Low-income sovereigns entering the crisis with elevated debt burdens or exposure to foreign-currency risk are most vulnerable.

Moody’s estimates that the suspension of debt-service payments could reduce the funding needs of eligible Moody’s-rated sovereigns by about US$10billion over the next eight months. This would only cover a fraction of the external gap, leaving an outstanding shortage of around US$40billion. New official sector disbursements are expected to help fill the gap, including emergency financing from the IMF.

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