Sub-Saharan African debt: A private insurer’s perspective
Paddy Harman, Sovereign Practice Lead and Senior Underwriter (Political Risks and Structured Trade Credit), at Allianz Trade looks into the eye of what could be a ‘perfect long storm’ for some Sub-Saharan African countries’ debt and how private insurers should respond. It’s not all bad news.
At the IMF Spring Meetings, Sub-Saharan Africa was again a main focus, and debt distress was again a main concern – as is the case for emerging markets as a whole. Twenty countries in the region are in debt distress or very close to debt distress. According to IMF Managing Director, Kristalina Georgieva, “this burden of debt is intolerable.”
We are truly in a totally unprecedented crisis. The war in Ukraine has sent food and fuel prices soaring, inflation is hitting record levels, growth projections have been revised down sharply, social risks are increasing, the dollar is strengthening, global monetary and financial conditions are tightening, China’s slowdown is stronger than expected, the embers of the pandemic are also still burning, and the likelihood of a global recession in 2023 has significantly increased. This very much looks like a perfect long storm. And low-income Sub-Saharan African countries are in the eye of that storm.
Zambia, Chad, Ethiopia have already signed up to the G20 Common Framework for Debt Treatments. And many countries have recently requested IMF programmes. So how should the private insurance market respond to Sub-Saharan Africa’s bleak outlook?
Some positive notes
Firstly, and on a much more positive note, not every country in Sub-Saharan Africa is in debt distress. While understandable (and certainly unsurprising), headlines such as ‘Looming Debt Crisis in Africa,’ ‘Debt Suffocating Africa,’ ‘Debt Apocalypse in Africa!’ (OK, I made the last one up, but you get my point) are not productive, and create an unfair perception that the whole continent is about to go ‘boom’. Many countries have registered strong and resilient performance during the pandemic, and are still well placed to steer prudently through this new crisis. And on balance, Sub-Saharan African economies are more robust than in the past.
In countries that are not at a high risk of debt distress, we at Allianz Trade continue to operate an active underwriting appetite, with a real focus on supporting strategic infrastructure projects, which provide a positive return to the country and its people. Too much debt has undoubtedly been wasted in the region, and more scrutiny needs to be applied. Positively, we are already seeing a significant improvement. ESG is a key pillar of our underwriting strategy, and our unique Green2Green initiative commits to invest the premium we earn on green transactions into green bonds.
However, we do accept a lot of countries’ debt metrics have deteriorated significantly since the start of the pandemic. For countries in ‘Debt Distress,’ or at a ‘High Risk of Debt Distress,’ our underwriting appetite is understandably more limited, and we are also managing existing exposure. We have still deployed some capacity on transactions that make sense; and we will strive to continue to support multilateral institutions as much as possible.
The private insurance market remains a huge supporter of multilaterals on the continent. We respect and admire their sustainable development mandate, and we also acknowledge their Preferred Creditor Status. A very positive development for Sub-Saharan Africa is the emergence of risk-enhancing structures and blended finance – often pioneered by multilaterals. These structures crowd in lenders and insurers (even in ‘difficult’ countries) at more affordable margins. It’s a win-win!
Not all doom and gloom
Debt restructurings, reschedulings, reprofilings – however they are termed, and however they are sought – will happen in some Sub-Saharan African countries. This is of course not great news for the private insurance market. And it is important to note that our market will likely struggle to support new transactions in countries which have signed up to the framework (especially in the short term). However, it is not all doom and gloom. The IMF has made it clear that ‘timely and orderly debt resolution is in the interest of both debtors and creditors.’ If a country really is struggling to manage its debt position, then surely an orderly restructuring is better than a ‘who-blinks-first’ chaotic one? Most countries will also want to protect future access to capital markets.
Overall, it’s a complicated picture in Sub-Saharan Africa, with storm clouds on the horizon. But there are also pockets of underwriting opportunity, and multilaterals are stepping up to the plate. Debt distress does loom menacingly, and we keep a watchful eye. But Sub-Saharan Africa has a history of resilience.