Nigeria, three others flirting with debt distress: Capital Economics

Nigeria, Kenya, Mozambique and Angola are teetering on the brink of debt distress as their bond spreads are around 1,000 basis points, London-based Capital Economics has said.

The economic research firm said on Friday that sovereign dollar bond spreads have widened again in many frontier markets over the past month or so. 

“Spreads over US Treasuries are above or near 1,000bp – a commonly-used threshold for sovereign debt distress – in 25 percent of the emerging markets that it track, (up from 20 percent earlier this year),” a senior emerging markets economist, Liam Peach, said in the Frontier Markets Monthly Wrap. 

To assess their debt vulnerabilities, Capital Economics put frontiers into three buckets: those that have already defaulted, those that are at high risk of defaulting and those flirting with debt distress.

“The first bucket includes countries such as Zambia, Sri Lanka and Ghana. Dollar bond spreads are above 3,000bp. The biggest problems are around debt restructuring,” Peach said.

He said China has continued to play hardball in negotiations and IMF funding has been held up. “There have been some reports that China is likely to drop its demand for multilateral creditors to take losses on their lending to Zambia, but a breakthrough remains elusive.”

The second bucket includes EMs whose bond spreads are firmly in distressed territory (far above 1,000bp) and that have not yet defaulted, such as Ethiopia, Tunisia, Pakistan, Argentina and Ecuador, according to the report.

“We’ve been concerned about financing strains and fiscal risks in Pakistan and Tunisia for some time. Both countries have among the largest budget deficits and debt burdens across frontiers,” Peach said.

He said developments in both countries have worsened recently and “there is a high risk of a sovereign default”.

“Tunisia’s President called out against the IMF’s hard-line fiscal consolidation mandate last month, sending bond spreads sharply higher,” he said. “Pakistan had been making slow progress in unlocking IMF financing, but has been rocked by protests in the past week and an IMF deal now appears much further away.”

In Argentina, it may be politically difficult for the government to meet the IMF’s targets ahead of elections this year and risks around debt sustainability could build, according to Capital Economics.

It said Ecuador’s political crisis has intensified and concerns about commitment to fiscal discipline have risen. “The sovereign has some breathing space for now, but risks could increase as debt repayments ramp up in a few years’ time.”

“The third bucket includes frontiers flirting with debt distress (bond spreads around 1,000bp). This includes Mozambique, Nigeria, Kenya and Angola,” Peach said.

He said Kenya’s debt trajectory has worsened in recent years and the FX share of debt has increased. 

“Authorities appear committed to fiscal consolidation and the country’s IMF programme provides a key fiscal anchor. But we think that debt risks are likely to increase, particularly with a debt repayment crunch point in 2024,” he added. 

According to Capital Economics, debt dynamics have improved in Angola in recent years and that high oil prices have provided more fiscal headroom.