G-20 debt freeze won’t fix eligible sovereigns’ liquidity pressures or medium-term debt challenges: Moody’s

„Most frontier market sovereigns are experiencing acute foreign-exchange liquidity shortages „Liquidity relief from bilateral creditors will only partially offset 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 this week.

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.

“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 debtservice 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.