EMERGING MARKETS-Debt relief a double-edged sword

11:35 a.m. Jun 14, 1999 Eastern By Gill Tudor

LONDON, June 14 (Reuters) - Ambitious plans by the Group of Seven (G7) for relief of poor country debt could be a double-edged sword for some potential beneficiaries, analysts said on Monday.

British finance minister Gordon Brown said at the weekend that the G7 would publish a detailed proposal for improved terms for partial debt write-offs under the Heavily Indebted Poor Countries (HIPC) initiative.

But analysts said such debt relief would damage access to international capital for the more creditworthy candidates such as Ghana or Kenya.

``They think they're rather above debt relief, though they wouldn't say no if it was forced upon them,'' said Gregory Kronsten, Africa economist at Westdeutsche Landesbank in London.

``It would hurt their ability to borrow offshore -- even in the form of syndicated loans, let alone looking ahead to offshore bond issues.''

Some 41 countries, mostly African, qualify in theory for debt relief under the 1996 HIPC initiative, which is backed by the International Monetary Fund and World Bank. So far only two -- Uganda and Bolivia -- have received any benefit.

Brown said G7 finance ministers had agreed to relax some of the arduous HIPC conditions for debt forgiveness, raising the number of potential beneficiaries to 36 countries from 29.

Non-governmental organisations lobbying for debt write-offs say even Brown's new deal, which he says could amount to relief of more than $70 billion, does not go far enough.

Market analysts say changes in the HIPC have very limited relevance for most foreign portfolio investors, because the vast majority of eligible countries offer little or nothing to buy.

Of the list of 41 countries, only a handful would be regarded as emerging or ``pre-emerging'' markets: Nigeria, Ghana, Ivory Coast, Kenya and perhaps Tanzania.

Ivory Coast has already in principle won HIPC relief from March 2001, but there was some confusion on Monday over which other countries might be serious contenders.

British Treasury officials said Ghana was one of the seven that could benefit under the revised HIPC conditions, which are to be finalised next weekend at a summit of the G7 plus Russia.

Analysts said the chances of Kenya or Nigeria qualifying for HIPC relief in the near future looked remote.

Nigeria is currently mending fences with the IMF and Western donors after returning last month to civilian rule after years of military dictatorship. But analysts say it probably has too many saleable assets to win debt relief at this point, and has no real track record of IMF-approved policies.

Kenya has fallen out with the IMF more recently and currently has no lending programme in place, although analysts say it has a good payment record on commercial debt.

It is precisely this market creditworthiness that would be damaged if Ghana or Kenya did receive debt relief under HIPC, analysts say.

Kronsten said Ghana's state Cocoa Board, for example, was currently able to pre-finance the annual cocoa crop through syndicated bank loans at highly competitive rates because of its quasi-sovereign status.

``If they get debt cancellation, their market for borrowing offshore goes down the pan,'' he said.

Debt relief brings another economic quirk in its wake.

Designed to cut debt service payments in the long term, it tends to push them up in the short term, as the debtor country is usually obliged to bring at least some arrears up to date.

``It's an anomalous problem, but you end up paying more money in the short term,'' said Ayo Salami, Africa equity analyst at Nomura International in London.

Eventually, the hope is that debt relief eases pressure on a country's balance of payments and channels resources into growth, be it through business or better health and education.

``But all these are 'jam tomorrow' stories,'' Salami said. ``Most investors want their jam today.''