All too frequently, Africa’s debt challenge is misunderstood and misdiagnosed. This decade alone has seen defaults in Ghana, Ethiopia and Zambia, restructurings in many countries, and emergency financing and IMF programmes in others. The prevailing narrative still frames African sovereign debt through the lens of insolvency.
Yet for many countries, the big issue today is not how much debt they owe but when that debt must be serviced (and just as importantly, the currency in which it is serviced). Rising debt service ratios (DSRs), clustered maturities and barely predictable foreign-exchange liquidity all combine to create extreme cashflow pressures. That makes it even more important to frame the present debt worries correctly, as problems of timing and liquidity call for a fundamentally different response from those of insolvency – one that is rooted not in restructuring, but in deliberate, market-based debt reprofiling.
Tactic of last resort
Sovereign debt restructuring is designed for when a country’s ability to pay its debt is impaired, leading to the threat of insolvency. It typically involves asset markdowns by bondholders, creditor coercion, ratings downgrades, and exclusion from international capital markets, all with the associated stigma. It is a tough fix that is best applied only in situations of insolvency.
Restructuring is often a poor response to liquidity stress
In Africa, this restructuring framework has been applied more broadly than is appropriate, often in response to liquidity stress rather than insolvency pressures. Even where debt levels have remained manageable, higher DSRs have triggered responses that should be reserved for cases of insolvency.
Treating cashflow pressures as insolvency is a misdiagnosis that locks countries into unnecessarily disruptive processes and restricts market access precisely when it is most needed. Debt restructuring erodes value and imposes unnecessary economic and reputational costs on issuers, exacerbating their problems. It may be one of the reasons why solutions such as the G20’s Common Framework for debt treatment have brought great stress to countries that have restructured debt under it.
Reprofiling
Sovereign debt reprofiling is a milder alternative to restructuring. It is a form of sovereign debt management that seeks to achieve debt sustainability without addressing the situation as a distress. It changes the timing of debt repayment cashflows while leaving the quantum as is. It tries to lessen near-term cashflow pressures without necessarily triggering credit events, allowing the debtor to retain market access, thereby reducing refinancing risk. It buys time for the debtor nation to tweak fiscal and macroeconomic factors as necessary.
Debt reprofiling often involves voluntary maturity extensions, bond buybacks and reissues to lengthen times to maturity, with new amortisation profiles replacing shorter ones, and bullet repayments (ie where the principal is repaid in a lump sum at the maturity date). Sinking funds can also be established or expanded to prefund impending obligations and give comfort to creditors. Credit enhancements such as guarantees can also be procured at reasonable cost to give creditors further comfort and win their support for a programme whose eventual outcome will be smoother debt repayment cashflows and greater relief for the debtor nation.
Addressing the maturity wall beats restructuring under creditor pressure
The opportunity for reprofiling the debt of African nations arises from the significant maturity bunching that characterises it. Over the past decade, the post-pandemic low-rate environment has encouraged many countries to access the eurobond markets for financing. However, most of these debts have been structured as bullet repayments, so when the repayment of the entire principal falls due, the debtor countries face large one-off FX outflows.
Often, the real risk is not the absolute size of the bond stock, but the concentration and timing of repayments. Large bullet redemptions exert pressure on a country’s FX reserves, ramping up the refinancing risk. They therefore drive solvent issuers into activities that should only be used in situations of distress. For debtor nations, proactively addressing the maturity wall is a less costly strategy than restructuring under creditor pressure.
Domestic dangers
In response to external debt pressures, some countries have turned to their domestic debt markets. The thinking here is that local currency borrowing reduces sovereign risk. The reality, though, is that while it reduces the FX pressure, it is just a reallocation of the risk from the international markets to the domestic financial system. The country’s banks, insurance companies and pension funds absorb highly concentrated sovereign debt onto their balance sheets, putting them at risk of contagion in periods of fiscal stress or monetary tightening.
What’s more, greater domestic borrowing by a government crowds the private sector out of debt markets, constraining investment in production in the economy. This is the case today in many African countries where the private debt markets are tiny compared with the government debt market, or all but non-existent. Effective debt reprofiling must accordingly take a portfolio-wide view and cover both external and domestic debt obligations. This ensures that domestic debt is not a silent amplifier of sovereign stress but a buffer against it.
How to do it
To put debt reprofiling in practice, debt management offices (DMOs) across the continent have to get some market-facing expertise. Traditionally awash with accounting, compliance and ex-post reporting skills, African DMOs need to actively grow or procure skills in yield curve analysis, refinancing risk assessment and liability management. DMOs must also work more closely with reserves management and FX operations units at the monetary authorities.
Refinancing stress must not be allowed to degenerate into distress
Decision-making in silos must be discouraged. Continuous engagement with creditors and investors is crucial. Investor calls, meetings on the sidelines of international events, and non-deal roadshows should feature among DMOs’ major activities. In short, liability management needs to be treated as a core macro-financial policy function rather than an administrative afterthought.
African nations are at a point in their sovereign debt management journeys where they must rethink strategies. Maturity concentration, currency mismatches and fragile market confidence are factors that have in the past turned mere liquidity pressures into seeming insolvency events. Debt reprofiling offers options that address liquidity issues as precisely that, and not as more serious financing issues. Refinancing stress must not be allowed to degenerate into distress, as when that happens, the choice set reduces dramatically.
Africa’s debt future will be shaped not primarily by how much it owes, but by how intelligently it manages the timing, composition and execution of its liabilities. For sovereign debt managers on the continent, it offers an opportunity to shift from crisis management to deliberate financial engineering.
