FocusEconomics Awards Interview – Dennis Shen, Chair of the Macroeconomic Council (Scope Ratings)

In this in-depth interview, Dennis Shen, Chair of the Macroeconomic Council at Scope, explores the evolving landscape of African debt, China-Africa relations and the challenges surrounding debt restructuring on the continent. Dennis provides a detailed analysis of how global economic trends, geopolitical shifts, and multilateral frameworks are influencing Africa’s public debt trajectory. He also shares insights into the limitations of current debt-restructuring mechanisms, the critical role of creditor coordination, and innovative solutions like the proposed DSSI+ model.

This comprehensive discussion sheds light on the urgent need for effective, inclusive, and equitable debt-relief strategies to prevent prolonged economic stagnation in Africa.

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Dennis Shen is the Chair of the Macroeconomic Council of Scope – the European credit rating agency. He is a strong and passionate believer in strengthening the precision of economic and financial judgment and forecasting – for anchoring better public-policy outcomes and supporting the greater efficiency of global financial markets. Dennis co-authored the DSSI+ debt-restructuring framework, advocating strengthened global debt relief for low- and middle-income economies.

He  is a regular contributor for the London School of Economics blogs, and supports the Berlin-based NGO, Visioneers gGmbH, on the Supervisory Board. Dennis sits as a member of the Experts Board of the Wikirating Association, and is an external lecturer on sovereign ratings at International School of Management (Berlin).

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FocusEconomics: Do you expect China to remain a key lender to African countries despite several of them having defaulted since the Covid-19 pandemic?

Dennis Shen: Although lending from China to African countries has slumped since the pandemic (it actually peaked as far back as 2013 excluding Angola), China remains very much invested in its relationship with Africa and is expected to remain a core lender to Africa, especially given the significant steps out from Africa the U.S. administration has recently taken.

The Chinese economy’s structural slowdown and increasingly stretched budgetary position have resulted in a degree of reconsideration of how China deploys its budgetary resources to accumulate global soft power and remain supplied with natural resources. Nevertheless, China will emphasize its own vision of industrialization and international system reform alongside a new mode of governance for the continent.

The Forum on China-Africa Cooperation 2024 pointed to a new age for the China-Africa relationship, referencing the elevation of China-Africa bilateral relations, the prospect of a fresh China-Africa trading and investment agreement, and the commitment to training African leaders.

What factors have driven Africa’s public debt levels and ratios to rise in recent years?

Dennis Shen: The debt of sub-Saharan African governments has increased from 23.1% of GDP in 2008 to an estimated 59.7% of GDP by 2024, according to International Monetary Fund data. In a similar vein, net interest payments have more than tripled over the same period. Africa’s rising government debt burdens have been driven by economic, financial and institutional dynamics:

First, African public finances have weakened since the global financial and pandemic crises. Commodity-exporting nations suffered especially following the commodity price boom’s end in 2014, leaving significant budgetary deficits.

Second, wide financing gaps (such as for investment in infrastructure) coupled with the low domestic savings rates of most countries of the region mean governments have had to rely on external financing to advance economic development.

Third, exchange-rate depreciation has had an adverse effect on sovereign balance sheets as a sizeable share of Africa’s public debt is denominated in foreign currencies (especially the U.S. dollar).

Should we expect more countries in the continent to default in the near future?

Dennis Shen: According to the IMF and World Bank, nearly half of the low-income economies of the continent are already in debt distress or at high risk of entering debt distress. We anticipate further distress in African economies with the likelihood of additional debt default and the requirement of debt relief.

This is more likely in an environment in which Federal Reserve rate cuts are on hold, where a strong dollar presents depreciation risks across the emerging markets and the risk of capital outflows, and where U.S. policy changes have temporarily paused foreign aid.

We have seen several countries work toward comprehensive debt restructuring deals this year; has the risk of a debt crisis in Africa changed? Is the risk high?

Dennis Shen: So far, only a few African governments have sought support under the Common Framework for Debt Treatments beyond the DSSI (Common Framework)—Chad, Ethiopia, Ghana and Zambia. This points to the limitations of the global debt-restructuring architecture and the restricted incentives for governments to pursue comprehensive debt restructuring. Given the ongoing debt crisis, multilateral institutions such as the G20 and Paris Club may be considering re-instituting the Debt Service Suspension Initiative (DSSI) and/or expanding the Common Framework. Nevertheless, such multilateral objectives may be significantly hindered by the U.S. government’s ‘America First’ policies since January and the decline of U.S.-centered multilateralism.

A more robust and inclusive debt rework is very much needed. The Third World debt crisis of the 1980s underscored the risk of a delayed and piecemeal approach to debt forgiveness in extending and exacerbating debt crises. In that case, only when significant debt write-downs were ultimately introduced after 1989 were Latin American countries able to begin recovering sustainably. Africa cannot afford such a decade of economic stagnation.

What are the main challenges that African countries are facing when working on debt restructuring deals?

Dennis Shen: The restructuring of African debt is complicated by the diversity of the creditor base today: African borrowers have edged away from an historical dependence on multilateral and bilateral forms of assistance to a rising dependence on less conditional and higher-interest forms of foreign financing.

Coordination between the diverse group of creditors today requires meticulous and painstaking negotiations to agree on any significant restructuring of outstanding debt as well as a commitment to equitable burden sharing.

China, as the largest single holder of African debt, has displayed some willingness toward aligning itself more with international standards and has become more multilateral in its approach. But it still needs to be more consistent in its approach on sovereign debt renegotiations. As an example, China joined the official creditor committees of Ghana and Zambia but not that of Sri Lanka. Achieving a unified stance from the creditor end is crucial for more consistent and effective debt forgiveness.

Are there existing mechanisms aimed at facilitating comprehensive debt restructuring? If so, which ones and what are their limitations?

Dennis Shen: The most important mechanism is the Common Framework (CF), introduced by the G20 in 2020. The CF supported the transition from the earlier DSSI architecture’s emphasis on the net-present-value neutrality of short-term liquidity provision to an emphasis on creditors accepting some degree of net-present-value losses and outright principal losses.

The CF has ensured a shared model for restructuring the external debts of poor nations since the pandemic. However, the CF has failed to permanently address problems of the uneven treatment of creditors, which is structurally hampering global debt re-working. Its emphasis on savings on short-term debt servicing, the lack of eligibility of middle-income economies, and the lengthy restructuring times are several further problems.

How could these mechanisms be improved?

Dennis Shen: I have argued for the design of a model I have named the “DSSI+”. The DSSI+ architecture argues that liquidity crises should be addressed through an outstanding three-pillar joint approach of the World Bank and the International Monetary Fund alongside the re-institution of the DSSI in support of sovereigns experiencing liquidity shortages. It calls for solvency crises to conversely be resolved through an expanded Common Framework that involves the private sector in debt renegotiations. An expanded Common Framework should bring debt cancellation and write-offs much more to the fore of strategic approaches.

Multilaterals should furthermore get back into the habit of engaging in debt relief beyond the crucial liquidity that multilaterals continue to deliver for poor economies. Aggregate collective action clauses are helpful in ensuring the comparable behavior and treatment of the private sector.

Expanding the CF to middle-income economies and introducing a more standardized mechanism for advancing the restructuring of domestic debt may prove resourceful given the increasing share of the debt of sovereigns in middle-income economies that is domestically borrowed.

How will the Trump administration affect debt dynamics in Africa, if at all? Do you think dynamics in Africa with China will be impacted by different U.S. policies under the Trump administration?

Dennis Shen: The announcements of the U.S. administration have had a considerable chilling effect. The current freeze on foreign aid and the downsizing—if not dismantling of USAID—have a huge impact.

This amounts to less official financing and a significant reduction in resources for Africa, affecting not just liquidity nearer term but also amplifying the outstanding debt risks of many nation states. This can accelerate solvency risks in the longer run insofar as sovereigns being forced to borrow on less concessional terms. China and other non-conventional parties may be looking to step into this void and increase the dependency of African nations on Chinese creditors.

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