Potential Impact of the Global Financial Crisis on Sovereign Debt of African Countries

1. Potential Impact of the Global Financial Crisis on Sovereign Debt of African Countries Matthias Rau Göhring Debt and Development Finance Branch UNCTAD Washington, 24 April 2009 – African Trade and Debt in the Global Financial Crisis

2. Current World Economic Situation • World GDP growth down to lowest level since WW II (-1.3 per cent in 2009) • Negative per capita growth in Africa in 2009 • Even worse: It does not rebound quickly (estimate for 2010: 3.8 per cent) • Full-blown financial and real economic crisis throughout the world • For most African countries: No decoupling; no fiscal and monetary policy space

3. Impact on African Economies • Dynamic effects due to • Rapid decline in trade flows • Decline in commodity prices • Reduced intermediate goods exports • Decreased access to finance for the corporate sector • Reduced remittances • Repatriated FDI earnings • ... • There is contagion from the financial sector as well as from the real economic sector

4. Impact on African Economies (2) • There is a high risk that achieved gains from prudent macroeconomic management, debt relief and official aid flows could be thwarted in many African countries • Potentially serious implications on poverty eradication and MDG achievement • New World Bank (2009) estimates on potentially dramatic increases in poverty and social vulnerability

5. MDG STATUS

6. Impact on Debt • Easterley (99) showed: Growth implosions are a major cause for debt explosions • External shocks on unprecented scale: • Slump in export prices and export volume • Bond market spreads multiplied • Capital inflows dried up • Debt ratios will deteriorate

7. African Debt Situation Source: UNCTAD secretariat calculations, based on World Bank, Global Development Finance; IMF, Balance of Payments; Economist Intelligence Unit database.

8. African Debt Situation (2) Source: UNCTAD secretariat calculations, based on World Bank, Global Development Finance; IMF, Balance of Payments; Economist Intelligence Unit database.

9. African Debt Situation (3) Source: UNCTAD secretariat calculations, based on World Bank, Global Development Finance; IMF, Balance of Payments; Economist Intelligence Unit database.

10. African Debt Situation (4) Source: Economist Intelligence Unit

11. African Debt Situation (5) • Achieving long-term debt sustainability remains challenge, also in post-completion point HIPCs (see 2009 HIPC implementation report) • Risk toward achieving debt sustainability due to low export bases/low degree of diversification of exports and resulting vulnerabilities to external shocks • Current financial and economic crisis will have negative impact on debt ratios and debt dynamics

12. African Debt Situation (6)

13. African Debt Situation (7)

14. Need for Responsible Lending and Borrowing • Increasing interest in responsible lending and borrowing during recent years both from lender and borrower side • Some donors have highlighted significance of building international consensus in this area • Low- and lower middle-income countries have weak negotiating position vis-à-vis their creditors • Resolution could be facilitated if lenders and borrowers could refer to agreed set of normative standards

15. Need for Responsible Lending and Borrowing (2) • EURODAD already developed a proposal for sovereign lending standards • Scope of UNCTAD’s project: • Develop internationally agreed guidelines and criteria for assessing the legitimacy of debt contracts • Supporting debt audits in selected countries • Research and analysis on illegitimate debt issues • Foster the development of a Structured International Debt Settlement (SIDS) • Protection of sovereigns against vulture funds

16. Implications for Debt Management • Effective debt management has rising importance, and is key in the current situation • Continuous monitoring and frequent analyses of the debt portfolio is necessary • Include domestic debt in debt portfolio analysis and DSA • Asset-liability-, and cash-flow management are crucial for reducing liquidity risks

17. Policy Measures • Sound macroeconomic policies conducted in the last years should not be abolished, but: • There will be need for increased government spending on social protection, job creating programmes, and infrastructure ▪ There is only limited fiscal space; new financing should be grants or highly concessional ▪ Monetary policy actions should also be considered, but with caution

18. Policy Measures (2) • The current DSF needs to be revised/enhanced: • Incorporation of domestic debt • Exterrnal shocks stemming from trade sector • Analysis of structure of debt • Inclusion of contingent liabilities • Sustainability will not be achieved if lenders and borrowers are not prudent; => need for globally accepted standards for responsible lending and borrowing

19. Policy Measures (3) • Need for a structured approach to resolving defaults and disputes between sovereigns, often referred to as Structured International Debt Settlements (SIDS) • Internationally, short-term facilities with low conditionalities to support countries in current account problems are needed

20. Summary and Conclusions • International financial and economic crisis will hit SSA developing countries more severely and longer lasting as initially expected • African continent will have negative per-capita growth rates in 2009, making poverty reduction and MDG achievement almost impossible • World leaders have just started w/ reforming the IFA. Need for more inclusive approach to the benefit of the poor

21. Thank you for your attentionmatthias.rau@unctad.org