G-20 debt service freeze supports liquidity, high debt level challenges will intensify: Moody's

May 18, 2020: The G-20 Debt Service Suspension Initiative (DSSI) announced on 15 April will free up resources for coronavirus-related spending, but at this stage is unlikely to ease the significant credit challenges that have been amplified by the coronavirus outbreak, Moody’s Investors Services said in a recently released report.

Moreover, as indicated in their previous research, should a country's application for DSSI entail a possibility of losses for private sector creditors, negative pressure on the sovereign ratings would ensue.

According to Moody’s latest research, many DSSI-eligible sovereigns are experiencing acute foreign-exchange liquidity shortages. The crisis has led to sharp falls in foreign-currency receipts from exports, foreign direct investment and remittances at a time when sovereigns' access to international capital markets is constrained. As a result, countries are drawing on their foreign-exchange reserves, diminishing the sovereigns' ultimate ability to meet external debt-service payments. African sovereigns have the largest external financing gap at around $40-$50 billion this year, or about 4%-5% of their GDP

Furthermore, the liquidity relief from bilateral creditors will only partially offset the immediate shock. The temporary debt-service suspension will cover part of the countries' external financing requirements, the report highlighted.

Moody’s estimated the amount of bilateral external debt-service relief available under the DSSI for Moody's-rated sovereigns at $10 billion, or 0.4% of aggregate GDP. The amount of relief currently offered to African sovereigns – around $6 billion or 0.5% of GDP – is significantly below its above-mentioned funding gap.

It also estimated debt service to private creditors over the equivalent period amounts to about $12 billion for Moody's-rated eligible countries, having increased markedly in recent years. As mentioned, a possibility of delayed payments to private sector creditors in general and under the DSSI would raise the prospect of a default under our definition

The report further stated that as the coronavirus shock is aggravating the credit challenges of high and rising debt burdens. Debt-service relief will not have a significant impact on medium-term debt trends that have materially worsened. The coronavirus shock and the authorities' associated policy response have opened large fiscal and external imbalances that will take time to unwind. Low-income sovereigns entering the crisis with elevated debt burdens and/or exposure to foreign-currency risk are most at vulnerable.