Opinion: Easing the pinch with ATIDI
Annabelle K Buzingo, Senior Underwriter at African Trade & Investment Development Insurance (ATIDI), explains how ATIDI can help address the debt burden for countries in Africa.
Ethiopia, Ghana, Zambia, Tunisia, Congo. These are just a few African countries that are currently facing a debt crunch or have already defaulted on international loans.
Africa's economic recovery from the impact of the COVID-19 pandemic is facing hurdles due to a mix of high debt and external challenges. A recent Debt Sustainability Analysis by the World Bank revealed that, by the end of September 2023, nine African countries were in a state of ‘debt distress,’ struggling to fulfill their debt payments. Additionally, 15 other nations, including Ethiopia, were at a significant risk of falling into a similar situation. Unfortunately, Ethiopia eventually defaulted on its payments in December 2023.
Beyond COVID-19, most countries showed significant economic recovery in 2021 but starting in 2022 they encountered high global inflation caused by supply chain disruptions associated with Russia’s invasion of Ukraine as well as lagged effects of stimulus packages introduced earlier by developed countries. In an effort to stem ballooning inflation, advanced economies’ central banks unleashed a series of steep interest rate rises.
As a consequence, African countries and other developing nations are facing difficulties to borrow and service debt due to high interest rates on global capital markets. Moreover, high interest rates in developed countries, especially the US, has led to significant depreciation of African currencies thereby elevating the cost of external debt service. Despite initiatives such as the Debt Service Suspension Initiatives (DSSI) and the G20 Common Framework, debt service grew from $58.6 billion in 2021 to an estimated $68.9 billion in 2023, a jump of $10.3 billion.
African countries' external debt service owed to bilateral, multilateral, and private creditors
Source: International Debt Statistics (IDS) database
Today, dozens of low- and lower-middle-income African countries are spending relatively more on external debt service than they are spending on health, education and infrastructure development.
But paradoxically, these same countries are not borrowing too much. In fact, African countries public debt levels are much lower than any other regions in the world. In 2022, public debt in Africa reached $1.83 trillion which is a fraction of the overall outstanding debt of developing countries which stood at $26.98 trillion. France or the Netherlands have double the amount in debt stock. Adjusted to GDP, the average debt ratio in sub-Saharan Africa stood at almost 60% of GDP by end-2022 which is a pale figure compared to France (112%), Japan (220%), Greece (166%), Italy (142%) or the US (123%)[1].
This suggests that the challenge faced by sub-Saharan countries is not in the volume of debt but rather its cost, particularly private sector debt which now accounts for 40% of Africa’s external debt. Private sector lenders, who rely on Western rating agencies, Fitch, Moody's and Standard & Poor's to price their risk, lend at untenable market rates.
For years, before the pandemic, African governments have been paying interest of 5% to 16% on 10-year government bonds, compared to near zero to negative rates in Europe and America. On top of that, foreign currency debt carries an exchange rate risk and is harder to refinance or restructure as it is owed to international rather than domestic lenders, making the debt even more burdensome.
ATIDI’s role
Against this background, the African Trade & Investment Development Insurance (ATIDI), legally known as the African Trade Insurance Agency, as Africa’s largest insurer for credit and political risks has made conscious efforts over the years to use its credit enhancement products to help its African member states reduce interest rate costs paid on both domestic and foreign debt in an effort to moderate the debt service burden they face. This, in turn, has enabled them to reduce the debt service burden, thereby freeing up more resources needed for development in social services and infrastructure. This is particularly important for sub-Saharan countries that allocate a significant proportion of their national income to debt servicing.
In delivering on its mandate, partnerships are a key driver of ATIDI’s business model, with multilaterals, ECAs and the private market.
In 2021, as the continent emerged out of the COVID-19 pandemic amid elevated energy prices, ATIDI participated in the Angola BITA water project, a $1 billion project set to expand and improve water supply service in the fast growing urban and peri-urban belts of south Luanda.
ATIDI, with reinsurance from the private market, provided lenders with a second loss insurance of up to $351 million, on top of the World Bank’s $500 million partial risk guarantee, to cover principal and interest thereby enabling the project to reach a financial close.
ATIDI’s cover mitigated the risk of the government’s failure to make debt service payments under the loans for the project and delivered competitive commercial debt to Angola, at the time when the sovereign’s bond yield was in double digits. The landmark BITA water project was also partly backed and financed by the French export credit agency (ECA), Bpifrance and is a testament to how joint Developmental Finance Institution (DFI) and ECA financing support can achieve Africa’s infrastructure [needs]. The next step would be to ensure there is a more collaborative structuring process between Multilateral Development Banks (MDBs), DFIs and ECAs in emerging markets.
Similarly, in 2023, Benin raised a €350 million 12-year senior unsecured amortising term loan facility to finance Sustainable Development Goals (SDG) projects. The facility benefited from a first claim guarantee from the African Development Bank (AfDB) and a second-claim guarantee through credit insurance provided by ATIDI resulting in zero net risk against the borrower. It proved that a country like Benin with a high-risk rating of B1, B+ and B+ by Moody’s, Fitch and S&P, respectively can access financing from an international commercial lenders on semi-concessional terms (fixed interest rate of 6% per annum), at a time when Eurobond market conditions were challenging and interest rates were on the rise.
With these types of blended finance structures, ATIDI and its partners can deliver financial solutions that can help improve access to finance for countries who greatly need it for their development spending. These solutions can be replicated on the continent to support Africa’s development agenda.
For as long as African countries are confronted with a global financial architecture that is misaligned with their needs, development finance will have to ensure financing of SDGs, climate adaptation plans, education, health, infrastructure, remain accessible and do not create an unmanageable debt burden or durably hinder growth for emerging countries.
In 2024, ATIDI will continue leveraging its insurance solutions to make sure Africa can access financing for development on a sustainable basis.
- Source: IMF and CEIC data ↑
