G-20 Debt Freeze Won't Fix Eligible Sovereigns' Liquidity Pressures or Medium-term Debt Challenges


Monday, May 18, 2020 / 2:18 PM / By Moody's Investors Service / Header Image Credit: Africa Feeds


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  • Most frontier market sovereigns are experiencing acute foreign-exchange liquidity shortages
  • Liquidity relief from bilateral creditors will only partially offset the immediate shock


The G-20 debt suspension initiative is unlikely to ease the significant credit challenges that the coronavirus pandemic has amplified in some frontier market sovereigns, particularly in Africa, Moody's Investors Service said in a report today.


By lowering debt-service payments at a time when government resources are limited and access to market financing is considerably constrained, the initiative will help to ease short-term liquidity pressures.


However, debt-service relief won't have a significant impact on medium-term debt trends that have worsened during the crisis. Bilateral relief would only cover a fraction of the increased external funding gap resulting from the shock.


"While debt-service relief will allow some governments to reallocate scarce resources toward health and social spending, it will not have a significant impact on weaker medium-term debt trends," said Lucie Villa, a Moody's Vice President - Senior Credit Officer and the report's co-author.

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"The coronavirus shock will lead to sharply lower growth this year, wider budget deficits and higher debt burdens for at least the next few years, as well as higher borrowing costs, at least for debt contracted on commercial terms."


"The prospect of significantly diminished revenue constraining debt-service capacity poses longer-term solvency challenges."


The coronavirus shock and the authorities' associated policy response have opened large fiscal and external imbalances that will take time to unwind. Low-income sovereigns entering the crisis with elevated debt burdens or exposure to foreign-currency risk are most vulnerable.


Moody's estimates that the suspension of debt-service payments could reduce the funding needs of eligible Moody's-rated sovereigns by about $10 billion over the next eight months. This would only cover a fraction of the external gap, leaving an outstanding shortage of around $40 billion. New official sector disbursements are expected to help fill the gap, including emergency financing from the IMF.

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