Africa’s reliance on Chinese loans makes experts fear more defaults
Chinese President Xi Jinping, third from left, meets with Angolan President Joao Lourenco, third from right, at the Great Hall of the People in Beijing, China on Tuesday October 9, 2018
Daisuke Suzuki / Getty Images
After Zambia became the first coronavirus-era debt default on the African continent, analysts are wondering whether countries heavily dependent on Chinese debt financing would be susceptible to debt distress.
The Covid-19 pandemic has posed challenges for a multitude of countries in sub-Saharan Africa that have borrowed heavily from China in recent years to finance large infrastructure projects, compounding pressures from slowing economic growth on the continent and falling commodity prices.
Zambia became the first country on the continent to officially default on its debt in November 2020, by opting out of a Eurobond repayment of $ 42.5 million.
As Africa’s second-largest copper producer, falling copper prices in recent years have made its $ 11 billion debt increasingly difficult to manage, but concerns have also emerged from Euro investors- obligations regarding the transparency of their Chinese loan repayments.
What we learned from Zambia
“The popularity of Chinese creditors has created a more diverse creditor base than the historic Paris Club bilateral lenders, making it more difficult to resolve repayment disputes,” said Aleix Montana, research associate at Verisk Maplecroft, in a recent report.
Montana said the Zambia case indicates that beyond the size of debt alone, the composition of creditors also plays a role in determining debt risk. Transparency issues mean Western bondholders are more likely to reject potential debt relief plans in countries borrowing from China, amid fears that debt relief will be used to pay off Chinese loans.
Resource-backed loans are often attractive to countries with rich natural resources, a need to finance infrastructure projects, and limited access to financial markets. In some Chinese financing agreements, commodities are used as a means of repayment or collateral, Montana said. Loans are often based on future production of resources such as cocoa, tobacco, oil or copper.
A man wearing a face mask selects clothes at a market in Lusaka, capital of Zambia, August 18, 2020. Confirmed cases of COVID-19 in Zambia continued to rise, with the total number approaching 10,000.
Xinhua / Martin Mbangweta via Getty Images
“Repayment agreements based on future value rather than quantity of a product are particularly risky for the borrower, since a fall in commodity prices in the world market would require an artificial increase in its production to cover the costs. debt obligations, ”Montana said. .
Zambia has now called for debt treatment under the G-20 (Group of Twenty) common framework, which aims to provide the poorest countries with transparent, level-playing terms to restructure or reduce unsustainable debt.
“Zambia is committed to transparency and equal treatment of all creditors in the restructuring process, and our request to benefit from the G20 Common Framework will hopefully reassure all creditors of our commitment to ‘such treatment,’ Finance Minister Bwalya Ng’andu said in a recent statement.
Oil producers and ‘resource-backed’ loans
Montana expressed concern about the high debt levels of oil-exporting countries such as Angola and the Republic of Congo, both of which have seen their national currencies devalued in recent years by the sharp drop in oil prices. .
This makes repayments denominated in foreign currencies relatively more expensive, while the reliance on reserve-based lending also exacerbates the risk of countries in debt distress, Montana suggested.
The United Nations Economic Commission for Africa (ECA) also stressed that Angola and the Republic of Congo were particularly threatened.
“In addition to being two of the countries with the highest risk of public debt and economic growth in our indexes, they are two of the countries that have borrowed the most from China,” Montana said.
The combination of the external economic recession, persistently high debt levels and a substantial proportion of resource-backed loans make Angola particularly vulnerable, he argued.
“The case of Angola is of particular concern, as it is estimated that around 75% of China’s total debt is financed in this way, often secured by oil exports,” he said.
“Angola is the country with the highest amount of Chinese loans, spread over 100 projects to finance oil and electricity of public enterprises.”
Montana suggested that Angolan businesses and investors can expect credit ratings to deteriorate further, suggesting that a sufficient recovery in oil prices may not happen soon enough for the country to honor its debt. debt restructuring obligations in 2021.
LUANDA, Angola – After Angola’s bloody civil war ended in 2002, the country enjoyed a decade of rapid growth fueled by its burgeoning oil sector. But in 2014, a worldwide drop in the price of crude, which accounts for 70% of government revenue, and the authorities’ failure to diversify the economy, plunged Angola into a serious financial crisis.
RODGER BOSCH / AFP via Getty Images
Other heavily indebted countries like Ghana and Mauritania are less exposed to Chinese debt, Montana pointed out, while Ethiopia, Cameroon, Kenya and Uganda have borrowed more heavily from China but are less exposed to the risk of default.
However, Pangea-Risk CEO Robert Besseling told CNBC that some of the steps Angola has taken since the start of the pandemic should allay concerns about over-indebtedness.
Angola joined the G-20 Debt Service Suspension Initiative (DSSI), granting a temporary suspension of repayments to bilateral creditors following the pandemic. He has also restructured a significant amount of Chinese debt and remains “on the good books of the IMF, at least for now,” Besseling said.
Angolan Finance Minister Vera Daves de Sousa told a Reuters conference in January that Africa’s second-largest oil producer would seek to take advantage of the “three-year respite” granted by the relief program in debt on its Chinese loan obligations of more than $ 20 billion. CNBC has contacted the Angolan government for comment.
“I would say Angola is exposed to a long-term threat of economic decline due to overdependence on its failing oil sector, but a mitigated risk of medium-term sovereign default due to government debt relief and loan restructuring, alongside continued multilateral support. “