Sub-Saharan African countries are the most likely to default on their debt
This year has seen a record number of sovereign defaults including Lebanon, Ecuador and Argentina. Zambia is the last country that seems to head towards a default as it asked its creditors to accept delayed interest payments. The ridiculous thing is that as the country was asking for relief, the ministry of finance unveiled the 2021 national budget, which presents an improvement in deficit. Nonetheless, that deficit needs to be financed through external debt.
All of a sudden, we are seeing other countries such as Angola and Chad asking for debt relief in the region. Kenya may be forced to seek relief under the G20 debt service suspension initiative as debt burden rose sharply amid poor domestic economic and exporting sector performance.
While these countries blame poor economic performances on the coronavirus pandemic, it is important to note that they were in dire economic conditions before the pandemic. However, they were managing to get by, service their debt and get more and more borrowings. The Covid-19 pandemic didn't create anything new; it just added pressure to already deep economic problems.
Evergrande: links between China and Sub-Saharan Africa adds pressure to EMs
We believe that concerns regarding the biggest real estate company in China are credit negative for all the EM world. The company seats on $120bn debt, which if it starts to tumble could cause a liquidity squeeze in the Chinese credit market. If that were the case, it would quickly leak to other developing markets, especially to those that are heavily borrowing from China. It will not come to a surprise to know that sub-Saharan countries are deeply indebted with the People’s Republic of China as well as some Latin American countries. Suppose the Chinese government needs to solve a liquidity squeeze caused by a large default such as the one of Evergrande. In that case, it may have its hands tight when it comes to supporting the countries it has been lending to in the past.
Bad news doesn't travel alone: 2021 will see the highest number EM sovereign debt redemptions
As per the graph below, the distribution of emerging market sovereign debt is concentrated in the next three to four years. 2021 is the year where will see the most redemptions. Refinancing of sovereign debt is not only crucial for emerging markets’ economies, but it is crucial even for their corporates. As a matter of facts, if the cost of funding rises for sovereigns, the one for corporates will rise accordingly pushing many companies into a liquidity trap.