Via Financial Times

Investors in developing countries’ sovereign debt are under growing pressure to postpone repayments and enter restructuring talks as the economic and healthcare crisis triggered by coronavirus, along with a flood of money out of emerging markets, edges nations towards a cash crunch.

The G20 group of leading developed and developing nations has urged private investors to join in with its suspension of repayments on bilateral official debt for 73 of the poorest countries — but richer countries will also look for help. According to IMF managing director Kristalina Georgieva capital outflows from emerging markets have topped $100bn and the fund has received more than 100 requests for help from troubled nations.

Ms Georgieva said last week that “good progress is being made with private creditors so they can join voluntarily on a basis of standardised approach . . . so there is no risk of moral hazard from others winning [because] some [are] doing the right thing”.

Leading investors concede that the private sector should be involved.

Richard House, head of emerging market debt at Allianz Global Investors, said it was “going to be hard for some in the G20 to stomach if they are granting a debt suspension this year [on official bilateral repayments] and the money goes to paying off private bondholders instead of spending on healthcare systems”.

Argentina

President Alberto Fernández, a leftwing populist, has repeatedly blamed his predecessor for running up over $300bn of debts that he insists Argentina cannot pay. His priority is to conserve scarce resources for social and health programmes.

The South American country has offered a restructuring deal on $65bn of external debt owed to private sector creditors; the deadline for acceptance is Friday.

But, he argued, “they should have made it a condition of the whole package. Trying to get bondholders to do this voluntarily just won’t work. No one’s going to volunteer if they think they’re the only one”.

Adam Wolf of Absolute Strategy Research, a London based consultancy, warned investors in a recent report to prepare for “an emerging market default wave”.

Venezuela

Ruled by revolutionary socialists for the past 20 years, the economy has collapsed, hyperinflation is rampant and ever-tighter US sanctions are being imposed to squeeze President Nicolás Maduro from power.

One of the world’s worst-prepared countries to face a pandemic, Venezuela sought $5bn of IMF help early in the crisis but was rebuffed. The fund said it could not lend because of the lack of clarity over the legitimacy of the government.

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US sanctions forbid any American from dealing in Venezuelan debt, making it impossible for private sector creditors to restructure the country’s $150bn of defaulted foreign debt.

He estimated that as much as 37 per cent of the bonds in the benchmark emerging market index, JPMorgan’s EMBI, will default over the coming 12 months.

But Mr House said the bonds issued by the 73 countries covered by the G20 deal are a relatively small chunk of the index, comprising roughly 8 per cent, meaning agreeing a standstill for these countries would not be ruinous for emerging markets’ debt as a whole.

Lebanon

Lebanon was already grappling with its worst economic crisis in years before the Covid-19 crisis. It defaulted on $1.2bn of foreign currency bonds in March, has debts of more than 150 per cent of GDP and a currency peg to the dollar which economists believe it can no longer sustain.

Under a restructuring plan Beirut hopes bondholders will accept a haircut. Lebanon has previously sought support from western and regional powers but donors, increasingly frustrated with a lack of reforms and the country’s dysfunctional politics, have been reluctant to stump up financing.

“I think the emerging market asset class can move on from this, as long as it’s done in a co-ordinated way,” he said.

But that is no simple matter. Even among poor countries, whose external debts are mostly with foreign governments and multilateral lenders, about a third of debt service due this year is to the private sector, split roughly equally between repayments to commercial banks and to bondholders — and for bigger emerging economies, bond markets play a much greater role.

Bar chart of as % of GDP, 2019 showing Government borrowing

Persuading bondholders to take a cut on their investments will not be easy. Leading fund managers have insisted that any deals should be done on a case-by-case basis, depending on the circumstances of each debtor nation.

“Would we be favourable? You can’t answer that question at a conceptual level,” said one asset manager involved in discussions among bondholders, who asked not to be named given the sensitivity of the issue.

“You would have to look at where each country is and its ability to service its debts. It could take a long time to go through the process.”

Since the start of the Covid-19 outbreak, analysts have been poring over debtor countries’ national accounts, working out which are most at risk of debt distress; some are more likely to inspire sympathy than others.

Iran

Iran is enduring a triple whammy of crippling US sanctions, Covid-19 and the collapse in oil prices.

After four decades of strained relations with the west, it has little foreign debt but has appealed to the IMF for a $5bn loan — thought to be its first ever request to the fund. Iranian officials have expressed concerns that the Trump administration will try to prevent any support package.

Few sovereign debtors evoke as little sympathy from creditors as Argentina, which was sliding towards a ninth default amid economic chaos even before the coronavirus crisis.

Its poor borrowing record and reputation for hostility towards creditors make it the example other debtor countries will want to avoid.

Zambia

Zambia faces an external debt burden of $11bn that is widely seen as one of the most precarious in emerging markets.

Africa’s second-biggest copper producer is even more at risk after prices for the metal fell, but President Edgar Lungu and his ruling Patriotic Front have an abrasive relationship with the IMF and prefer to deal with Chinese lenders, who are owed $3bn. The Chinese loans have helped meet infrastructure promises while the strings attached to IMF loans are seen as more onerous.

“The suspicion is that they want to do anything and everything they can to hang on to elections next year, and are hoping that the Chinese will come to the rescue,” said Bradford Machila, an ex-cabinet minister. “Their biggest concern is the terms [IMF lending] would come with. But they are getting less and less of an option to do anything other than that.”

“The IMF and the World Bank are very focused on the lowest income countries and Argentina is unlikely to get much sympathy as a higher-income country,” said William Jackson, chief emerging markets economist at Capital Economics in London.

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“There must be enormous pressures to increase health spending but they didn’t do themselves any favours in the way they presented the [debt restructuring] offer.”

Zimbabwe

Zimbabwe is locked out of access to international financing even as hospitals are in desperate condition and prices for basic goods are surging. 

Arrears owed by President Emmerson Mnangagwa’s government to international financial institutions remain unpaid, which forbids the IMF from lending. The fund had been overseeing a reform programme that could have led to a deal on clearing the arrears, but reforms have been blown off course by evidence of systemic graft.

Economy minister Martin Guzmán has argued the country cannot afford to pay more and offered “in good faith, a redrawing of our debt commitments”. But some investors are riled; one said his attitude reflected his background in academia. “The minister is super-stubborn and has zero real market experience,” said one financier. “For him, it’s all about showing his theory is right, and then going back to [university].”

Kevin Daly, a portfolio manager at Aberdeen Standard Investments, contrasted Argentina’s “adversarial” attitude to bondholders with Ecuador’s more consensual approach.

South Africa

South Africa has approached the IMF as part of a 500bn rand ($26bn) pandemic stimulus — ending a long stigma over going to the fund for help.

The ruling African National Congress has long been suspicious of strings attached to IMF loans, even as South Africa’s cost of borrowing has surged. 

President Cyril Ramaphosa emphasised that the IMF terms for pandemic financing will be relatively light, but South Africa still faces having to issue large amounts of bonds this year. The issuance will be difficult for investors to absorb given the fragility of emerging markets and South Africa’s recent downgrade to junk by leading rating agencies, say analysts.

“The problem with Argentina is the new government came in and blamed everything on the previous administration and the IMF,” he said.

Whereas when negotiating a recent payment standstill, the Ecuadorean government “approached all their creditors to seek a solution on friendly terms, and got overwhelming support”.

Reporting by Jonathan Wheatley, Tommy Stubbington, Michael Stott, Andrew England and Joseph Cotterill