China’s Debt Relief To Support Liquidity In Stressed Emerging Markets

China’s debt relief efforts have the potential to add support to a number of emerging markets (EMs) under pressure from the coronavirus pandemic-related shock. Such debt relief could ease near-term liquidity pressures, particularly for sovereigns that have substantial amounts of debt owed to state-linked Chinese entities falling due in 2020. However, the terms and impact of Chinese debt relief are likely to vary on a case-by-case basis.

The Chinese government has committed to participate in the G20’s debt service suspension initiative (DSSI), which provides for temporary suspension of debt repayments for 77 developing nations falling due between May-December 2020. In line with this, China’s president, Xi Jinping, in a speech to the Forum on China-Africa Cooperation (FOCAC) on June 17 indicated that Chinese financial institutions should consult with African countries to work out arrangements for loans with sovereign guarantees, which we view as official bilateral debt.

China’s involvement in the G20 initiative marks the first time it is participating in coordinated, multilateral global debt relief efforts. Relief from debt service obligations owed to China could play a role in easing liquidity strains faced by a small subset of the countries eligible for the DSSI. The International Institute of Finance (IIF) estimated in May that China accounted for over 25 percent of the total external debt of DSSI-eligible countries, making it their single largest bilateral creditor.

Fitch [Ratings]-rated sovereigns that have a significant share of their external debt owed to China and are eligible for DSSI include Kenya (B+/Negative), the Maldives (B/Negative), Ethiopia (B/Negative), Cameroon (B/Negative), Pakistan (B-/Stable), Angola (B-/Stable), Laos (B-/Negative), Mozambique (CCC), Republic of Congo (CCC) and Zambia (CC).

Some of these, such as Kenya, have said they will not seek debt relief under DSSI as they feel that it could harm their standing in capital markets.

China may offer some debtors more extensive relief than is envisaged under the DSSI. Angola, for example, has confirmed that it is renegotiating its financing facilities with China.

China’s involvement in the G20 initiative marks the first time it is participating in coordinated, multilateral global debt relief efforts.

President Xi has also said that his government will cancel interest-free government loans due to mature by end-2020 for relevant African countries under the scope of FOCAC. Fitch believes that interest-free loans form only a small part of the total bilateral debt owed to China for most countries. The China Africa Research Initiative at the Johns Hopkins University School of Advanced International Studies estimates that similar pledges to African countries resulted in an average cancellation of around USD96 million per year in 2016-2019.

China has extended more substantial debt relief in the form of maturity extensions, lower interest rates, and debt-service payment re-profiling to several countries in recent years, including the Republic of Congo (2018-2019), Cameroon (2019), Ethiopia (2018) and Mozambique (2017). In some of these cases, notably the Republic of Congo and Ethiopia, Chinese debt relief has facilitated the release of IMF funding.

Where relevant, we will take into consideration the prospects for, or impact of, debt relief from official bilateral creditors, including China, when assessing the liquidity pressures and debt sustainability of rated sovereigns.

Bilateral debt service suspensions can reduce strains on credit profiles by easing pressures on external liquidity. However, the challenges facing many stressed EMs relate not only to liquidity but also to debt sustainability.

Fitch’s sovereign ratings apply to borrowing from the private sector, so official bilateral debt relief would not constitute a default for sovereigns that take advantage of it. Should private-sector creditors follow the appeal by the G20 and offer debt service relief, this could qualify as a default, but currently we do not view this as sufficiently likely to affect sovereign ratings.

About Jan Friederich

Jan Friederich a macro-economist and Senior Director with Fitch Ratings, which he joined in 2015. He holds an MPhil in International Relations from the University of Cambridge and an MSc in Financial Economics from the University of London. He completed his undergraduate training at the Free University of Berlin in political science, economics, law, and philosophy.