Drowning in Debt

Zambia’s default leaves Angola as Africa’s most exposed borrower

By David Whitehouse

Posted on December 3, 2020 15:44

Webp.net-resizeimage – 2020-06-16T112211.462 © Kaombo Norte floating oil platform is seen at night off the coast of Angola, REUTERS/Stephen Eisenhammer
Kaombo Norte floating oil platform is seen at night off the coast of Angola, REUTERS/Stephen Eisenhammer

The burden of servicing debt, a high dependency ratio and China’s reduced need for oil leave the odds stacked against Angola avoiding Zambia’s path into default in the medium term.

A debt moratorium, or an “extend and pretend deal” will buy Angola time, but nothing more, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. “They will default at some point.”

The country’s debt-relief package with China Development Bank is yet to be finalised, with only a framework agreement reached. It’s hard to know what’s holding it up, says Bohlund. Angola is reported to have owed China US$28.6bn at the end of last year, with China Development Bank accounting for $14.5bn.

READ MORE Seeking debt relief, Angola opens door of oilfield holdings to China

Time is the one thing in Angola’s favour. The next eurobond redemption is not until November 2025. Still, it has commercial debt redemptions amounting to $3.4bn in 2021. Deutsche Bank and Gemcorp Capital are among heavy corporate lenders to the Angolan government and state-owned enterprises, says REDD Intelligence.

  • Angola and Zambia struggle with a very high level of debt service payments as a proportion of government revenue, says Bohlund.
  • Research from Renaissance Capital in November arrives at a similar conclusion using a different measure.

Both countries have high levels of elderly and children in relation to their working-age populations.

READ MORE Zambia’s dependency ratio indicates future debt crises

Such countries are most at risk of excessive debt burdens, as seen in Latin America in the 1970s and 1980s, says Renaissance, which picks out Angola as a default risk.

Dispersed creditor base

According to the European Network on Debt and Development, the overall sub-Saharan Africa proportion of government revenue spent on external debt service payments more than doubled between 2010 and 2018 to 10.8%.

Angola’s share is volatile and high, surging from 14% in 2014 to 40% in 2016, before falling back to 32% in 2018.

READ MORE China’s Angola relief proves Africa can withstand Zambia default

REDD Intelligence says that commercial creditors in emerging and frontier markets are more dispersed than in the run-up to the Latin American debt crisis in the 1980s. This time around, asset managers have a bigger share of frontier and emerging market sovereign debt than international banks.

  • That makes negotiating a co-ordinated private sector position much harder as asset managers all have their own fiduciary duties, says REDD Intelligence.
  • The scale of losses faced by lenders in Zambia have yet to be faced, adds Bohlund. Fund managers can’t come clean about the scale of their exposure as their clients would dump them.
  • “Bondholders have an incentive to say the default is isolated and that everything will be fine.”
  • On the plus side, REDD Intelligence says, dispersal means that potential creditor losses don’t threaten banking solvency, as was the case in the 1990s among US banks who had lent to Latin America.

Oil dependence

China’s need to secure a reliable supply of oil drove its involvement in Angola in the early 2000s. Global oversupply of crude now means that China needs Angola less than it used to, says REDD Intelligence.

READ MORE Why Africa’s oil exporters should worry about the China-Iran megadeal

Angola is Africa’s second-biggest oil exporter, but its main oilfields are maturing and new discoveries are needed just to maintain production levels, says Bohlund.

  • He notes that the country used to be a major coffee exporter, but sees no easy way to diversify the economy away from oil. “There are no quick fixes. There’s nothing that’s pain-free.”
  • Stronger African credits that are more likely to be able to sell new debt, he says, include the Côte d’Ivoire, Senegal and Kenya.

Bottom line

The international creditors of oil-dependent countries such as Angola will have to bite the bullet and write off debt.

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