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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. Current World Economic Situation.

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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

current world economic situation
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
impact on african economies
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
impact on african economies 2
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
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MDG

STATUS

impact on debt
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
african debt situation
African Debt Situation

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

african debt situation 2
African Debt Situation (2)

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

african debt situation 3
African Debt Situation (3)

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

african debt situation 4
African Debt Situation (4)

Source: Economist Intelligence Unit

african debt situation 5
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
need for responsible lending and borrowing
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
need for responsible lending and borrowing 2
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
implications for debt management
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
policy measures
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

policy measures 2
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
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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
summary and conclusions
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