Zambia is looking at ways to restructure its debt, Lebanon defaulted on its obligations last week and has entered into restructuring talks, Argentina is looking to default if it does not meet its debt obligations by the 22nd of May. Rwanda, Kyrgyzstan, and Madagascar have each been allocated more than US$100 million; while Nigeria borrowed US$3.4 Billion emergency financing from the International Monetary Fund (IMF) to help combat the battle against the pandemic. You may ask, what all of these countries have in common. They are all emerging markets, with most of them in steep debt, struggling to pay back and may need more capital. Altogether, emerging markets owe about US$71 trillion.
Why is this Important?
These are signs that emerging markets are heading towards a debt crisis. Such economies owe the majority of the debt to bond funds, which invest in bonds at a fixed rate of interest. Investors (such as high net worth individuals, institutional banks, insurance companies, etc), will invest in these funds and look to realise their profits from these funds. Unlike public sector institutions like the IMF that may be more willing in light of the pandemic to waive or take on more debt, bond funds (operating in the private sector) are more concerned with earning money from their investments in bonds and heading off to invest again. These investors have the legal right to bring proceedings against these economies for defaulting on financial obligations and have been known to do so in the past.
Now when applied to the pressure that tackling a global pandemic brings, you can see how this might be an issue for emerging markets. Such economies have to decide between paying money owed plus interest to investors or continuing to borrow more in order to protect its people with effective healthcare to tackle the pandemic.
Why Are Emerging Markets Struggling?
You might be wondering, why this is an issue for emerging markets and not as much of an issue for other developed economies. Simply put, emerging markets are not well equipped to deal with the pandemic. This is due to factors such as inefficient medical facilities and infrastructure to support the population. To put it in context, while in London, the ExCeL centre was rapidly converted to the Nightingale Hospital in a matter of weeks with a capacity of around 3,500 people, most emerging markets will not have the fiscal capacity to support this quick and sudden adaptation.
As a result, these economies are in desperate need to make up for this gap through increased borrowing.
Threat of Poverty
Though it may have been easier for developed economies to cope during lock down, it was not as easy for emerging economies to do so. Due to the lack of financial support. Developed countries such as the US ($2.2 trillion), the UK (more than $430 billion) and France, (more than $375 billion) have been able to provide fiscal stimuli to help support people that are out of work and the wider economy. Emerging economies cannot afford to on the same scale. Nigeria, for example, announced a $136 million programme as support and Tunisia issued $850 million, while the South African president, Cyril Ramaphosa stated and I paraphrase that “while a lock down is the most effective way to curb the spread of the virus, this cannot be sustained, our people need to earn a living, our people need to eat”. The IMF has estimated that emerging economies will need at the very least $2.5 trillion to survive this global pandemic. In emerging economies, the support for the population is simply not enough for people to stay at home.
The World Bank has estimated that 49 million people will be pushed into extreme poverty because of this pandemic. Out of that figure, 23 million will be from Sub-Saharan Africa and 16 million from South Asia. Some of these countries have experienced numerous looting of food; highlighting the fight for survival.
To force many people in emerging economies to adhere to the strict lock-down restrictions is to ask them to choose between death with the possibility of survival from the coronavirus, or death by starvation.
Many emerging economies rely on one way of economic growth. Due to the coronavirus, this may prove to be catastrophic. For example, most economies that rely on oil may have their currencies devalued (as was the case in Nigeria where revenue from oil production is 31% of the 2020 budget revenue and oil accounts for 90% of foreign exchange), due to the fall in oil prices. Another example is tourism. Places such as Kenya, Egypt, Thailand, and the Maldives have begun to feel the pain of the lack of visitors to their countries, due to a reduction in air travel.
Impact on Law firms
Lawyers that work in areas such as debt finance, restructurings, capital markets, and emerging markets will receive a lot of work at this time. Investors, bond funds, and representatives from emerging markets will look to meet at the virtual negotiation table to come to a compromise on how such debt payments can be made.
As a lawyer, you would be expected to brainstorm in order to find practical solutions to defaults in debt obligations, engage in the various drafting and redrafting of contracts, and communicate with a variety of clients in multiple jurisdictions.
What to look out for
Uber eats is eyeing Grubhub
Uber Eats is looking to buy Grubhub another American food delivery service. This shows that despite a forecasted slowdown in the Mergers & Acquisitions market, companies are still very much willing to participate in deals at such times. I believe this depends on the sector. As you can imagine, with lock-down restrictions, people may still want to dine from restaurants, which may lead to high demand in the food delivery market, making room for potential growth.
To read more about the initial aid that was offered to some economies at the start of the pandemic, check out our story here: https://bamenation.co.uk/2020/03/20/banks-to-the-rescue-the-high-street-saga/