Fitch Ratings-Hong Kong-28 September 2020: The recent downgrade of Zambia’s rating could herald a series of sovereign defaults in Sub Saharan Africa (SSA), where several rated sovereigns face acute liquidity pressures and very high debt levels, and where the debt burden has risen sharply across most sovereigns over the last decade, says Fitch Ratings.
Fitch downgraded Zambia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘C’ from ‘CC’ on 24 September, reflecting our view that the suspension of interest payments on its three global bonds proposed in the “consent solicitation” issued by the Zambian government would constitute a distressed debt exchange, which if approved would lead the rating to move to Restricted Default (RD).
This year has already seen a record number of sovereign defaults, including Lebanon, Ecuador, Suriname and Argentina. The pandemic’s impact was not the key factor in most of these cases, although it has substantially added to pressures on liquidity and debt sustainability in many emerging markets, including a number in SSA. As a result, the share of countries in the region with government interest payments relative to revenue above 30% is now higher than before the debt-reduction initiatives that alleviated low-income countries’ debt burdens during the 2000s.
In addition to Zambia at ‘C’, Fitch rates four SSA countries at ‘CCC’, indicating that default is a real possibility. These are Angola, the Republic of Congo, Gabon and Mozambique. Angola and Gabon were downgraded in September and April, respectively, this year. Cabo Verde is at ‘B-’ with a Stable Outlook, and a further six sovereigns are rated ‘B’, of which four (Cameroon, Ethiopia, Lesotho and Nigeria) are on Negative Outlook, and two (Benin and Ghana) on Stable.
Zambia is one of the countries that has been granted bilateral debt-service relief under the G20’s Debt Service Suspension Initiative (DSSI). A further 21 Fitch-rated countries are among the 73 that are eligible for the scheme, although not all have applied to participate. The G20 finance ministers and central bank governors are set to consider the feasibility of extending the DSSI beyond 2020 at a meeting on 14 October, and Fitch believes an extension to 2021 is highly likely.
Zambia has put its consent solicitation to private Eurobond holders in the context of the DSSI, while it is not formally linked to the G20 initiative, and we still believe that DSSI participation in itself does not signal a high risk of debt-service rescheduling for private creditors.
The World Bank and the IMF have advocated the inclusion of debt to private creditors within the scope of the DSSI. However, Fitch continues to believe that mandatory inclusion of private-sector debt service as a condition for official debt relief under DSSI is unlikely, as it would greatly reduce the number of countries participating in the initiative. If sovereigns request debt-service suspension from private creditors, this could qualify as a distressed debt exchange and lead to the rating being revised to ‘RD’ if Fitch judges it necessary to avoid a traditional payment default.
Head of Middle East and Africa Sovereigns