The collapse of the global financial markets, and the threat of a major global economic recession, have radically altered the backdrop of Africa's economic woes, which were looming even before the COVID-19 pandemic.



With the ratio of government debt to national income reaching record levels, and the limited availability of resources across the continent, it is apparent that combating COVID-19 in Africa will be more challenging than in other parts of the world. Africa has experienced unprecedented declines in trade, tourism and commodity prices, causing government revenues across the continent to wear thin during this period.

It has been recorded by the United Nations Economic Commission for Africa that the continent is in need of at least $200 billion in financial support – further exposing the resource shortages that African governments face. This monumental task has not discouraged various international and regional institutions from stepping up to provide some much-needed financial aid, and other international organisations having announced programmes to offer support to developing countries. Unfortunately, these efforts fall significantly short of the $200 billion required, resulting in a further need for bilateral debt relief for low-income countries, harmonised with parallel treatment regarding private and commercial debt – which serves as a significant portion of many African countries' external debt and a disproportionate portion of the debt-servicing cost.

Many millions of workers' livelihoods are in jeopardy as they struggle to maintain basic incomes. Meanwhile, investors' appetite for risk has also decreased – a direct result of the pandemic – which has pushed up the cost of borrowing in financial markets, limiting workable options for resource mobilisation. Nonetheless, African governments are responding to COVID-19 with determination to avoid a deeper and more protracted banking and economic crisis by introducing policy measures and supporting the private sector, especially small-and medium-size enterprises (SMEs). These measures include paying SMEs arrears, ensuring minimal disruption to the flow of credit, reducing capital ratios and interest rates.

When lockdown measures were first announced, business owners and corporations had to take swift action to support their balance sheets. As mentioned, African governments also launched various initiatives to support short term finance for eligible businesses. Nonetheless, borrowers are actively looking to the private sector for additional finance because they either do not qualify or because they simply need more debt than made available.

With the 2008 financial crisis in mind, the main concern for borrowers was whether the economic impact of the pandemic, or related operational challenges, might affect lenders' ability to provide funding, coupled with concerns regarding covenant terms and access to additional debt. Throughout the lockdown period, numerous vulnerabilities in loan agreements have also been brought to the fore, forcing borrowers to approach lenders for assistance in the form of amendments and waivers. The most common areas of concern include:

  • provisions relating to changes, suspension or cessation of the business as the lockdown forced borrowers to suspend or shut down their operations.
  • compliance with financial covenants as a result of a decrease in profits, an increase in drawn debt and trade restrictions.
  • provisions in relation to borrowing base requirements and asset valuations.
  • provisions in relation to limits on incurring debt.
  • provisions relating to reporting and audit and submission of financial statements.
  • material adverse change representations and events of default which often turn on the financial condition of borrowers.

As we move forward, some of the temporary solutions borrowers put in place at the start of lockdown will need to be revisited. Whatever those solutions may be, maintaining a dialogue with lenders will be key. There have also been discussions in the market to include clauses in facilities that attempt to accommodate the impacts of the pandemic – for example, rather than subjecting the borrowers to minimum liquidity covenants or the delivery of monthly financial statements over the term of the facility, the loan agreement might allow for some relaxation once certain targets are achieved, or over certain time periods.

Alongside the focus on liquidity and the raising of funds, we have also seen some developments in the debt capital markets space. As investment grade bonds contain limited covenants, there is some incentive for issuers with the rating to favour accessing those markets over bank lending. The same does not apply to high yield issuers and other issuers with negotiated covenant packages, who have had to consider the challenge of consent solicitations or, in some cases, virtual bondholder meetings.

During this period, issuers will have to revisit the disclosures made in their prospectuses to take into account the impact of the pandemic when issuing new debt. This presents a challenge for issuers when attempting to strike a balance between ensuring that reliable disclosures are made, whilst attempting to deal with the unknown consequences of the pandemic. We have seen that issuers are disclosing the effects of COVID-19 in a number of different ways, including a COVID risk factor, setting out the specific impact that the pandemic has had on that issuer's business and, more generally, the wider global economic and financial consequences of the pandemic. In other instances, issuers are adding COVID-19 disclosures into existing risk factors or including a "recent developments" section within business descriptions.

Issuers also need to consider whether they can continue to make unqualified "no significant change" and "no material adverse change" statements within prospectuses. The increasing view being taken is that these statements should be qualified by other disclosures within prospectuses. Again, the challenge for issuers is how to make these statements specific where it is impossible to quantify the impact of COVID-19 on an issuer's financial position.

On the other end of the spectrum, the banking sector in Africa also remains vulnerable to systemic failure – a direct result of lending to households with volatile income and no assets. This is likely to result in a sharp increase in non-performing loans. Institutions at risk include those with high concentrations in sectors like hard-currency, short-term funding or interbank liabilities. To address the risks of failure in banking systems, policy measures introduced by regulators include lowering the base rate – reducing bank cash reserve ratios, government bond buying programmes and debt moratoriums for banks.

Beyond the immediate responses, the pandemic and its economic fallout expose the longer-term efforts needed to diversify Africa's economies and to broaden domestic revenue sources. Some of the next steps are vital to combat the pandemic and prepare for durable economic fallout:

  • Expanding the eligibility criteria for the debt standstill to countries classified by the International Bank for Reconstruction and Development. This group of countries include Algeria, Angola, Egypt, Libya, Morocco, South Africa, and Tunisia.
  • Creating processes to increase private creditors' participation and developing solutions guaranteeing debt sustainability and continued access to capital markets in the future.
  • Leveraging special drawing rights and exploring innovative options while developing workouts for bilateral debt.
  • Creating strict governance measures around utilisation of mobilised resources and strengthening accountability and transparency.

It is worthwhile pausing briefly to expand on the need for African countries to find solutions to track, monitor, and evaluate the utilisation of funds. Well-balanced partnerships with technology platforms can ensure resources reach those most in need expeditiously in the future and will restore investor confidence in various African economies – as the likelihood of corruption will naturally decline. Further and more generally speaking, the pandemic has also highlighted the need to support uptake and innovation in the digital economy in Africa, including supply chains, consumer services and trade.

Looking to the long and winding road ahead, there remains considerable uncertainty around the future of African economies. However, it is imperative that Africa embraces true structural reform in order to enhance economic growth and to forge new economies in light of this global reality. Finally, the COVID-19 crisis has also brought to the forefront the possibilities of a digital economy – offering efficiency and productivity gains. This presents an opportunity for Africa to become a global hub for innovation, and to continue to re-build economies in the post COVID-19 environment.


Swart is a Director and Goncalves an Associate, Banking & Finance practice at Cliffe Dekker Hofmeyr