Sovereign Debt Through the Lens of Asset Management: Implications for SADC Countries
In a new working paper, the Director of the Global Development Policy Center, Kevin P. Gallagher, and Non-Resident Senior Research Fellow, Yan Wang discuss debt sustainability in the Southern Africa region and the role of China as a lending partner and lay out policy options for alleviating the debt burden.
Countries within the Southern African Development Community (SADC) have suffered from the COVID-19 pandemic, subsequent capital flight, and economic downturn. These forces, which were in no way due to actions within SADC, now also present a looming debt crisis for the region. This paper attempts to address debt sustainability issues from two different angles for SADC countries— a conventional “Debt-to-GDP ratio” approach and a “public sector balance sheet” approach. In addition, the authors assess whether and to what extent Chinese debt is a significant source of debt distress. The authors develop a series of potential policy options for alleviating the debt burden of countries in debt distress which includes first and foremost liquidity support from the multilateral financial organizations. Second, to address the long-term structural issues, SADC countries can work with patient capital holders, such as Multilateral Development Banks (MDBs), regional and national development banks from abroad. Innovative refinancing arrangements can be explored and designed carefully and worked out, including but not limited to “Asset-based refinance” and potentially debt-for-climate swaps. The advantage of these approaches is that they provide liquidity without hurting a country’s credit rating. In the long term, patient capital is needed to address the country’s structural issues, such as capacity development for export competitiveness.
The COVID-19 pandemic has laid bare the fact that the “hyper-globalization” has made it impossible to contain crises within national borders. Multilateral international cooperation is no longer a choice but a necessity. This paper attempts to address debt sustainability issues from two different angles for SADC countries—a conventional “Debt-to-GDP ratio” approach and a “public sector balance sheet” approach. In addition, the researchers assess whether and to what extent Chinese debt is a significant source of debt distress. To the extent the authors find certain creditor groups to warrant restructuring, we develop a series of potential policy options for alleviating the debt burden of countries in debt distress.
Section 1 provides an overview of the economic impact of COVID-19 on SADC countries. Section 2 reviews the previous literature related to debt sustainability and the Heavily Indebted Poor Countries (HIPC) initiatives; Section 3 examines the sovereign debt situation using the traditional debt-to-GDP ratio, Section 4 introduces an approach focusing on asset and liabilities — the public- sector balance sheet approach. Section 5 discusses the patient capital that is important for sustainable development; and Section 6 presents a few policy options.Download the Working Paper