Chinese President Xi Jinping, third from the left, meets with Angolan President Joao Lourenco, third from the right, at the Great Hall of the People in Beijing, China, Tuesday, October 9, 2018
Daisuke Suzuki / Getty Images
After Zambia became the first non-payment of debt in the coronavirus era on the African continent, analysts wonder whether nations that are heavily dependent on Chinese loan financing are likely to suffer from debt.
The Covid-19 pandemic has raised difficulties for a number of sub-Saharan African countries that have borrowed substantially from China in recent years to finance major infrastructure projects, exacerbating pressures from the continent’s slowing economic growth and falling commodity prices. .
Zambia became the first country on the continent to formally pay off its debt in November 2020, opting for a $ 42.5 million bond repayment.
As Africa’s second largest copper producer, falling copper prices in recent years have made it increasingly difficult to manage the $ 11 billion debt pile, but there have also been concerns from Eurobond investors about transparency of its loan payments in China.
What I learned from Zambia
“The popularity of Chinese creditors has created a more diverse credit base than the historic bilateral creditors primarily at the Paris Club, which complicates the resolution of repayment disputes,” said Aleix Montana, Verisk Maplecroft research associate, in a recent report.
Montana said Zambia’s case indicates that beyond the size of debt, the composition of creditors also plays a role in determining debt risk. Transparency concerns mean that Western bondholders are more likely to reject potential debt reduction packages from borrowing countries in China because of fears that the debt reduction will be used to repay Chinese loans.
Resource-backed lending is often attractive to nations with rich natural resources, the need to finance infrastructure projects and limited access to capital markets. In some of China’s financing agreements, the goods are used as a means of reimbursement or guarantee, Montana pointed out. Loans are often based on future production of resources such as cocoa, tobacco, oil or copper.
A man wearing a face mask chooses clothes at a market in Lusaka, the capital of Zambia, on August 18, 2020. The cases confirmed by COVID-19 in Zambia have continued to grow, with the total number close to 10,000.
Xinhua / Martin Mbangweta via Getty Images
“Repayment agreements based on the future value rather than the quantity of a commodity are particularly risky for the borrower, as a drop in commodity prices in the global market would require an artificial increase in its output to cover debt obligations,” Montana said.
Zambia has now called for debt treatment under the G-20 (Group of Twenty) common framework, which aims to provide poorer nations with transparent conditions of competition through which to restructure or reduce unsustainable debt obligations.
“Zambia is committed to transparency and equal treatment of all creditors in the restructuring process, and our call for the G20 Common Framework will hopefully support all creditors in our commitment to such treatment,” the finance minister said. Bwalya Ng’andu in a recent statement statement.
Oil producers and “resource-backed” loans
Montana has expressed concern about high debt levels in oil-exporting countries, such as Angola and the Republic of Congo, both of which have seen their national currencies devalue in recent years due to the sharp drop in oil prices.
This makes foreign currency repayments relatively more expensive, while the use of reserve-based loans exacerbates countries’ risk of debt, Montana suggested.
The UN Economic Commission for Africa (UNECA) also highlighted both Angola and the Republic of the Congo as particularly at risk.
“Apart from being two of the countries most at risk in government debt and the growth of our indices, these 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-intensive lending makes Angola a unique vulnerability, he said.
“Angola’s case is particularly worrying, as it is estimated that about 75% of China’s total debt is financed in this way, often by oil exports,” he said.
“Angola is the country with the largest amount of Chinese loans, distributed in 100 projects to finance oil and state-owned enterprises.”
Montana has suggested that Angolan companies and investors can expect credit ratings to continue to deteriorate, suggesting that a sufficient recovery in oil prices will not come soon enough for the country to meet its debt restructuring obligations in 2021.
LUANDA, Angola – After the end of Angola’s bloody civil war in 2002, the country enjoyed a decade of rapid growth fueled by its booming oil sector. But in 2014, a global drop in crude oil prices, which account for 70 percent of government revenue, and the authorities’ failure to diversify the economy plunged Angola into a severe financial crisis.
RODGER BOSCH / AFP via Getty Images
Other heavily indebted countries, such as Ghana and Mauritania, are less exposed to Chinese debt, Montana pointed out, while Ethiopia, Cameroon, Kenya and Uganda have borrowed more from China, but are at lower risk of unpaid.
However, Pangea-Risk CEO Robert Besseling told CNBC that some of Angola’s measures since the onset of the pandemic should ease concerns about debt suffering.
Angola has joined the G-20 DSSI (Debt Service Suspension Initiative), granting a temporary suspension of repayments to bilateral creditors following the pandemic. It has also restructured a considerable amount of Chinese debt and remains “in the IMF’s good books, 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 years of breathing space” provided by the debt reduction program in Africa. the $ 20 billion plus of Chinese loan obligations. CNBC contacted the Angolan government for comment.
“I would consider Angola to be exposed to a long-term threat of economic decline due to its over-reliance on its bankrupt oil sector, but with a mitigated risk of default in the medium term due to reduced government debt and loan restructuring. of continued multilateral support. “