How to prevent a looming debt crisis in Africa

With a sovereign debt crisis looming in many African countries, including South Africa, President Cyril Ramaphosa has pleaded for a global response to prevent a debt crisis in the continent. The President, who is also the Chair of the African Union, has urged private creditors to provide much-needed debt relief, so that growth is not stifled in these economies. During a recent interview on CNBC Africa, Charles Robertson, Global Chief Economist at Renaissance Capital, and Roy Mutooni, Analyst at ABSA Asset Management, discussed the implications of seeking private sector relief versus letting the market provide a solution. The conversation revolved around the potential impact on borrowing costs, market access, and the long-term growth prospects for African economies. Let's delve deeper into the key highlights of the discussion. The GDP numbers in South Africa have shown signs of improvement, with both experts noting a broad-based recovery following the easing of lockdown restrictions. However, the discussion quickly turned to the looming debt crisis and the call for private creditors to play a role in supporting growth. Charles Robertson expressed skepticism about the approach, highlighting three key concerns. First, he pointed out the lack of consistency in linking COVID-related shocks to debt relief, noting that Latin American countries, hardest hit by the pandemic, were not receiving similar considerations. Second, Robertson emphasized the importance of attracting investment for infrastructure development in Africa, warning that penalizing private sector investors could deter much-needed capital inflows. Lastly, he underscored the discriminatory nature of targeting private creditors, suggesting that such a move could set a negative precedent and raise borrowing costs in the future. On the other hand, Roy Mutooni echoed Robertson's sentiments, emphasizing the potential repercussions on market access and investor confidence. He emphasized that debt forgiveness could lead to higher borrowing costs for frontier markets like Africa, limiting their ability to fund critical infrastructure projects. Mutooni argued that maintaining market access and accommodating developed market capital could ensure a more sustainable solution for all parties involved. Robertson further cautioned against the lasting impact of debt relief on private investors, drawing parallels with Argentina's history of defaults and subsequent difficulty in regaining market trust. He warned that a debt moratorium driven by external shocks, such as the current pandemic, could lead to higher interest rates and long-lasting consequences for African economies. In conclusion, both experts advocated for a market-driven approach to address the debt crisis in Africa. They highlighted the unprecedented low-interest rate environment globally as a potential solution to attract investment and spur economic growth. While recognizing the challenges posed by the current economic climate, they stressed the need for a balanced and sustainable strategy that considers the long-term implications on market dynamics and investor confidence.