Four Questions About Debt and Financing Risks from COVID-19 in the Middle East and North Africa

IMF News, April 28, 2021

Source details

Canonical URL: Four Questions About Debt and Financing Risks from COVID-19 in the Middle East and North Africa

Many countries were already facing high debt:
- By the end of 2019, one-half of MENAP countries had government debt ratios above 70 percent of GDP.
- One in four countries faced public gross financing needs above 15 percent of GDP annually.
Limited access to external financing led governments and large state-owned enterprises to turn to domestic banks, expanding banks’ exposure to the public sector in several MENAP emerging markets:
- Over 20 percent of total banks’ assets in Iraq, Jordan, and Qatar.
- Above 45 percent in Algeria, Egypt, and Pakistan.
- Up to 60 percent in Lebanon.
- By contrast, banks in emerging markets elsewhere had a public sector exposure of 12 percent.
Structural impediments to domestic debt market development:
- Banks’ excess liquidity in some countries and an underdeveloped institutional investor base in others.
- Lack of a more vibrant private sector created incentives for banks to hold government bonds until maturity, hindering domestic debt market liquidity and development.

Economic collapse reduced fiscal revenues while governments increased spending to mitigate the pandemic’s impact, worsening fiscal balances across nearly all countries.
Compared to pre-pandemic expectations:
- Primary deficits in MENAP expanded by an average of 7.5 percent of GDP in 2020.
- These higher deficits, combined with the economic slowdown, resulted in a 7 percentage-point average increase in debt-to-GDP ratios.
Role of domestic vs. international financing:
- Although one-third of MENAP countries tapped international financial markets—representing 25.5 percent of worldwide emerging market issuances—domestic financing played a critical role during the first phase of the crisis.
- Governments in Egypt, Jordan, Pakistan, and Tunisia covered more than 50 percent of their public gross financing needs with domestic bank financing in 2020.

Projected financing needs:
- Public gross financing needs are projected to rise to a total of $1,044 billion in 2021–22, from $780 billion in 2018–19.
- Financing needs during 2021–22 are expected to remain above 15 percent of GDP, on average, in most MENAP’s emerging markets.
- External debt amortization needs are limited at about 4 percent of GDP.
Implications of limited access to international markets:
- Banks’ exposure to the state is likely set to accelerate, potentially crowding out private sector credit when private financing is needed to spur recovery.
Potential shock scenario and additional fiscal pressure:
- The Regional Economic Outlook estimates budgetary needs could be further exacerbated by 3 percent of GDP under a potential shock scenario involving rapid tightening of global financial conditions along with delayed fiscal adjustment due to a protracted recovery.
- If domestic banks fund these unexpected needs, in addition to the expected financing needed during 2021–22:
- Egypt, Oman, Pakistan, and Tunisia would absorb an additional 10 to 23 percent of banks’ assets as government debt by the end of 2022.
- As a result, Egypt and Pakistan’s banks could reach levels of public sector exposure similar to those currently seen in Lebanon.

Adopt credible and clearly communicated medium-term fiscal and debt management strategies with careful coordination among monetary, fiscal, and financial sector regulatory authorities to form a common view on domestic financial markets’ overall absorption capacity.
For countries with limited or no fiscal space:
- Initiate growth-friendly consolidation plans as the crisis subsides.
For countries with market access:
- Proactively mitigate rollover and refinancing risks.
- Engage in liability management operations (such as extending maturities) to improve terms on existing debt and the medium-term debt profile.
For countries where market access is more limited:
- Consider reprofiling commercial and bilateral debt.
Develop domestic capital markets and broaden the investor base to reduce banks’ overexposure to the state:
- Expand banks’ opportunities to diversify their assets, including through further progress on financial inclusion.
- Over the medium term, consider changes to banking regulations to reduce the existing bias of banks’ asset portfolios toward government bonds.

By Jeta Menkulasi, Cesar Serra, and Suchanan Tambunlertchai; IMF Middle East and Central Asia Department; April 28, 2021.