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 says in a research report today.

"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. 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 debt-service capacity poses longer-term solvency challenges," says Lucie Villa, the report’s author and a vice president at Moody’s.

Key points:

» The coronavirus shock has triggered acute external liquidity stress for the most vulnerable sovereigns

» The G-20 Debt Service Suspension Initiative (DSSI) 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

» Should a country's application for DSSI entail a possibility of losses for private sector creditors, negative pressure on the sovereign ratings would ensue

» Moody’s estimates that the external funding gap for Moody's-rated IDA-eligible and Least Developed Countries (LDC) – those eligible to seek relief under the G-20 initiative - stands at about $40-$50 billion in 2020, with Africa accounting for virtually that entire amount and Asia running a small external surplus

» Debt-service relief will not have a significant impact on medium-term debt trends that have materially worsened