EDITORIAL: Fitch and S&P’s downgrade of Ethiopia’s sovereign rating, because it applied for debt relief under the G20 common framework, has thrown what could turn out to be a giant monkey wrench into the whole process by which the world’s richest countries are offering to suspend the debt of some of its poorest ones. And since it was the special circumstances caused by the coronavirus pandemic, especially the global lockdowns that came with it, that forced the G20 to even consider a temporary debt moratorium in the first place, the actions of these two rating agencies now threaten to take the wind out of the entire initiative. That is precisely what World Bank chief economist Carmen Reinhart feared when she said that “countries will weigh this in… especially those countries which are still hoping to access private capital, to tap capital markets,” and added that “the prospect of being downgraded is going to be a deterrent.”
This framework, which comes in addition to payment relief under the G20 Debt Service Suspension Initiative (DSSI), is open to more than 70 poor countries of which Pakistan is also a part. And surely at least some of them would have had second thoughts as they watched yields on Ethiopia’s dollar-denominated bonds shoot up from 6 percent in January to 9 percent after they filed for the debt relief. Not all of the countries expecting the relief have international bonds outstanding, but literally each and every one of them can do without downgrades that are sure to spook foreign direct as well as portfolio investment.
Reinhart also explained why Fitch Ratings and S&P could not have timed their actions any worse either. One of the most recurring problems with efforts to provide debt relief to poor countries is that often the amount calculated as relief is not enough, so “countries have to go back to the drawing board to resolve problems again.” Yet now, with the G20 common framework, finally there was hope that the first round of meaningful debt reduction would finally get under way sooner rather than later. And now there’s this rather powerful deterrent that has reminded poor countries of the old adage that if something looks or sounds too good to be true, then it most probably is not.
Clearly, there is a very urgent need for international financial institutions (IFIs) and also G20 countries to put pressure on rating agencies and rein them in at least till the pandemic’s headlock on the global economy is overcome. Snap downgrades because of debt relief where both rich and poor countries agree to the terms would not only push some among the latter dangerously close to default but also destroy their fragile bond and debt markets that are still in their infancy and need to be nurtured. That way the weaker economies will remain burdened by loans and also get pushed out of international debt markets.
These developments raise the stakes for Pakistan, of course, since we were among the first countries to welcome the debt relief and Prime Minister Imran Khan went even as far as implying that the best way to help poor countries survive the ongoing global recession would be to permanently write off most if not all of their debt. Now, suddenly the relief initiative has changed form from very welcome news to a choice between the lesser evil between keeping the quantum of debt intact and inviting a harsh downgrade that could, among other things, snatch our emerging market status away from us.
This is just the right time for the world’s rich countries to put their foot down and make sure the common framework advances without any further unpleasant surprises. Helping developing countries is, in fact, in the best interest of the advanced countries as well since both would need each other after the pandemic subsides in order to lubricate international commerce and keep supply chains up and running if nothing else. Therefore, debt relief initiatives must not be allowed to turn into yet more complicated and cruel debt traps. Poor countries are already juggling between retiring old debt and arranging new loans. And considering all the constraints of the pandemic and slowdown, the kind of one-step-forward-two-steps-back debt relief scenario that has been triggered by two of the most followed rating outlets could leave them wrong-footed at the most inopportune of moments.
Copyright Business Recorder, 2021
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