EM debt pressures build as IMF calls for ‘early’ action on restructuring

IMF managing director Kristalina Georgieva on Thursday urged highly indebted governments to act “decisively and early” to restructure as investors warned of a wave of negotiations with EM bond issuers.

Although unprecedented public debt levels globally were partly because countries “rightly need to boost spending to fight the crisis”, said Georgieva, for many low-income countries urgent action is required immediately to deal with debt burdens. And it is “critical” for all countries to address this in the medium term, she said.

The G20’s DSSI debt relief initiative, extended by six months on Wednesday, does not tackle the issue. World Bank president David Malpass said the challenge was to “look beyond DSSI”, as it does not reduce payments.

“Interest charges compound quickly on the deferred amounts, leaving countries with even more debt,” said Malpass. The DSSI is a stopgap that must be used “while a longer-term solution for the debt crisis can be developed”.

Vera Daves, Angola’s minister of finance, said in an IMF discussion that the DSSI provided benefits, but that the country also had to “revise and update our medium-term debt strategy”, ensuring that dialogue with creditors could ensure a “win-win solution to manage difficult times”.

2020 has already been a busy year for EM bond restructuring, with Argentina, Ecuador and Belize having completed negotiations and Lebanon, Suriname and Zambia in the process. Though Covid-19 pushed some of these over the edge, most were already restructuring candidates. But there are more to come.

While even single-B countries have issued in the second half of the year, bond markets indicate the chance of stress.

“EM bond markets are mostly calm because we’ve been smothered in developed market liquidity but it is constructive to look where the debt is trading,” said Jim Barrineau, global head of EM debt strategy at Schroders. “EM investment-grade is close to pre-pandemic levels but sub-investment grade EM spreads remain around 200bp wide of pre-pandemic levels.

“There will be continued concern about potential restructurings and the negative impact of higher debt stocks for already highly indebted countries. Either growth picks up meaningfully or these countries will have to address this.”

Several candidates likely

Several high yield bond issuers have leaned on the IMF in 2020, and Petar Atanasov, co-head of sovereign research at Gramercy, said he was paying “a lot of attention to the IMF’s firepower and whether it can be increased”.

“If we see the multilateral response to Covid-19 as a multi-round game rather than a single round, it will be more difficult — economically and politically — to engage in the following rounds,” said Atanasov.

“Being able to knock on the door for liquidity relief was a huge help for many EM governments, but the question now is to what extent something deeper is needed, and whether markets will finance the weaker sovereigns.”

Atanasov said there were “several candidates” for restructuring in 2021, with sub-Saharan Africa particularly vulnerable as fundamentals and debt-carrying capacity were weak. Some Caribbean countries may have to restructure unless tourism recovers meaningfully, while El Salvador’s is also on investors’ radars.

Beyond capital markets that are swimming in liquidity, many low-income countries do not have access to bonds. For these countries, multilateral lenders are the only source of finance, said Lesetja Kganyago, governor of the South African Reserve Bank, at the IMF on Thursday.

“That is why it is important that we make sure that the IMF is not just well-resourced but is also capable of offering concessional facilities to countries that do not have market access,” said Kganyago.

Charlie Robertson, global chief economist at Renaissance Capital, offered an alternative view. “There is a big misunderstanding about debt right now,” he said. “Debt forgiveness should not be the focus, debt expansion should be. African debtors will be able to refinance their debt at the cheapest rates they have ever borrowed at [and] should be looking at how to refinance their debt over the next two years.”