The debt service suspension initiative (DSSI) came to an end last December, after it provided fiscal breathing space to developing economies throughout the COVID shock. The debt service on official debt is now resuming, yet most of the beneficiary countries are still recovering from the crisis. And some of them are further fragilized by the economic consequences of the Russian invasion in Ukraine. Should we then regret the phasing out of the DSSI?
Looking ahead, this post (i) outlines the external debt dynamics in the years to come for DSSI countries, (ii) highlights the resulting challenges in terms of budget and market operations, and (iii) stresses on the key macroeconomic risks.
2022, a pivotal year
The DSSI beneficiary countries will face a “double whammy” impact this year. Indeed, they will have to honor “regular” debt payments and, in addition, to reimburse the debt service that was suspended under DSSI in the first place[1]. This “double whammy” is not dramatic in 2022, as only debt suspended between April and December 2020 (USD 3.2bn[2]) will start to be reimbursed. In 2023 and 2024, however, those amounts would include amounts suspended in 2021 (USD 9.7bn), and become more significant - at over USD [3]bn or [0.2]% of the countries’ GDP per year[3].
Figure 1. The net impact of DSSI is moderate in 2022 but will rise in following years[4].
The “danger zone” is still two years away. Based on current projections, debt service will rise until 2024. In 2022, external debt service will step up above its pre-crisis levels (USD 56bn vs. USD 40bn in 2019) - essentially driven by an increase in concessional debt service (+USD 16bn). We expect these dynamics to accelerate, rising to USD 59bn in 2023 and USD 71bn in 2024. One reason is that most DSSI countries borrow from concessional sources, and do not suffer from explosive debt trends. Some of them, however, have more heavily relied on commercial debt with relatively short maturities. And, in some countries – such as Pakistan –, debt subscribed in 2021 will already have a significant impact on repayments in 2024.
Figure 2. The jump in external debt service is expected in 2024, especially to private creditors
Tensions may crystallise for a handful of countries
Debt service aggregates hide difficult situations for several countries. Combining the above analysis of external debt service profile with countries' macro-fiscal performance, we identify the DSSI-eligible countries, which may face challenges servicing their debt. These challenges can materialise on their budget as well as on their market refinancing operations.
For some sovereigns, external debt service will increasingly weigh on budget allocation. The capacity of sovereigns to mobilise sufficient fiscal revenues is essential to preserve public debt sustainability. From this standpoint, the situation of DSSI-eligible countries varies widely. Some 15 countries will see their external debt service representing over 18% of their fiscal revenues - that is a substantial share. And, as compared to the pre-crisis level (2019), 10 of the countries will see their external debt service to revenues ratio increase by over 10 percentage points on average over 2022-24 (Yemen, Laos, Zambia, Bhutan, Comoros, Cabo Verde, Somalia, Mongolia, Guinea-Bissau, Maldives, Timor-Leste).
Figure 3. For 15 countries, debt service will excessively weigh on public finances
Besides, the refinancing of external debt may also prove challenging for some countries. 5 sovereigns will have an external commercial debt service in excess of USD 1bn in 2023 (Angola, Cote d’Ivoire, Ghana, Nigeria and Pakistan) and 9 in 2024 (adding Bangladesh, Ethiopia, Kenya and Zambia). And, focusing on international market debt, 6 countries will face Eurobond principal repayment in excees of USD 500m in 2023 or in 2024 (Ethiopia, Honduras, Kenya, Mongolia, Nigeria, Pakistan).
Table 1. Refinancing schedule for countries with bonds outstanding
All eyes on the macro-outlook
Immediate risks are not as much driven by the debt service burden per se, as by downside risks on the macroeconomic outlook.
Economic activity is deteriorating fast. According to the April 2022 IMF WEO projections, 8 of the 67 DSSI-eligible countries considered in the analysis would not have recovered their 2019 (pre-crisis) real GDP level by 2023. And 19 would have grown at an average annual rate of less than 1%. As of June 2022, those projections might be too optimistic, as developing countries experience food and energy prices shocks, higher interest rates and the consequences of the COVID lockdowns in several Chinese cities.
Many countries still suffer from major fiscal weaknesses. For 33 countries (out of of 73 DSSI-eligible countries), the primary balance is expected to be lower in 2024 than it was in 2019. And 50 will be posting a fiscal primary deficit, on average over 2022-24. Raising revenues is a long-term issue, but has also deteriorated with the COVID-19 crisis: government revenues as share of GDP, are expected by the IMF to be lower in 2023 than they were on average over 2015-19.
Figure 4. Two macro challenges ahead for DSSI countries: low growth and fiscal imbalances
Bottom-line: a basic model of debt dynamics shows that debt service remains manageable under the scenario drawn by the IMF in April 2022. Yet, risks are tilted on the downside. Several countries are indeed losing market access, and the most recent global shocks are putting downward pressures on economic activity and fiscal performance. Debt sustainability risks should therefore be closely monitored.
[1] According to the G-20 recommended rescheduling terms, the debt service payment suspended in 2020 would start being reimbursed in 2022, and those suspended in 2021 in 2023.
[2] According to the G-20 communique (February 2022), USD 12.9bn were suspended between April 2020 and December 20201, of which USD 3.2bn were suspended in 2020 according to the World Bank (April 2022)
[3] Based on a debt sustainability analysis. Out of the 73 DSSI-eligible countries, six countries were excluded in the absence of data in the World Bank data base (Kiribati, Marshall Islands, Micronesia, South Sudan, Tuvalu) or in the IMF WEO database (Afghanistan).
[4] Estimated by applying the G-20 recommended rescheduling terms to the USD 12.9bn of debt service suspended over April 2020 – December 2021: the c. USD 3.2bn suspended over April 2020 – December 2020 are assumed to be reimbursed over 3 years after 1 year of grace period, and the c. USD 9.7bn suspended over January 2021 – December 2021 are assumed to be reimbursed over 5 years after 1 year of grace period.