Chinese President Xi Jinping, third from the left, will meet on Tuesday, October 9, 2018 with Angolan President Joao Lourenco, third from the right, in the Great Hall of the People in Beijing, China
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After Zambia became the first default of the coronavirus era on the African continent, analysts are asking whether countries that are heavily dependent on Chinese loan financing would be susceptible to debt crisis.
The Covid-19 pandemic has caused problems for a number of sub-Saharan African countries that have borrowed significantly from China in recent years to finance major infrastructure projects, exacerbating the pressure due to a slowdown in economic growth of the continent and falling commodity prices.
Zambia became the first country on the continent to formally default on its debt in November 2020, withdrawing from a repayment of $ 42.5 million.
As the second largest copper producer in Africa, falling copper prices over the past few years have made the $ 11 billion debt pile increasingly difficult to manage, but also worries eurozone investors about the transparency of its Chinese loan payments.
What we learned from Zambia
“The popularity of Chinese creditors has created a more diverse credit base than the historical mainly bilateral credit providers of the Paris Club, which complicates the resolution of repayment disputes,” said Aleix Montana, research associate of Verisk Maplecroft, in a recent report .
Montana said the case in Zambia suggests that the composition of creditors plays a role in determining debt risk. Concerns about transparency mean that Western mortgage holders are more likely to reject potential debt relief packages in countries borrowing from China, for fear that debt relief will be used to repay Chinese loans.
Resource-backed loans are often attractive to countries with rich natural resources, the need to finance infrastructure projects and limited access to capital markets. In some of China’s financing arrangements, commodities are used as a means of repayment or collateral, Montana emphasized. Loans are often based on future production from sources such as cocoa, tobacco, oil or copper.
A man wearing a face mask chooses clothes at a market in Lusaka, Zambia’s capital, on August 18, 2020. Zambia’s confirmed COVID-19 cases have continued to rise, with the total number close to 10,000 points.
Xinhua / Martin Mbangweta via Getty Images
“Repayment transactions based on the future value rather than the quantity of a commodity are particularly risky for the borrower, as a decrease in commodity prices on the world market would require an artificial increase in its production to cover the debt obligations,” he said. Montana said. .
Zambia has now applied for debt treatment under the Common Framework G-20 (Group of Twenty), which aims to provide poorer countries with a transparent level playing field through which unsustainable debt obligations can be restructured or reduced.
“Zambia is committed to transparency and equal treatment of all creditors in the restructuring process, and our application to benefit from the G20 framework will hopefully assure all creditors of our commitment to such treatment,” said Finance Minister Bwalya Ng’andu , recently said statement.
Oil producers and ‘resource-backed’ loans
Montana has expressed concern about the high debt levels in oil-exporting countries such as Angola and the Republic of the Congo, both of which have devalued their national currencies over the past few years due to the broad fall in oil prices.
This makes foreign currency repayments relatively more expensive, while the use of reserve-based loans also exacerbates countries’ risk of debt shortfall, Montana suggested.
The UN Economic Commission for Africa (UNECA) has also endangered both Angola and the Republic of Congo in particular.
“Apart from being two of the countries with the greatest risk in government debt and economic growth in our indices, they are also two of the countries that have borrowed more heavily from China,” Montana said.
The combination of the external economic downturn, the persistently high debt levels and a significant portion of the resource-backed loans make Angola uniquely vulnerable.
“The case of Angola is of particular concern, as it is estimated that about 75% of the total Chinese debt is funded in this way, which is often ensured by oil exports,” he said.
“Angola is the country with the most Chinese loans, spread over 100 projects to finance oil and state-owned enterprises.”
Montana has suggested that companies and investors in Angola can expect credit ratings to deteriorate further, suggesting that an adequate recovery in the oil price may not be fast enough for the country to meet its debt restructuring commitments 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, in a severe financial crisis, Angola plunged a global slump in the price of crude oil, which accounts for 70 percent of government revenue, and the failure of the authorities to diversify the economy.
RODGER BOSCH / AFP via Getty Images
Other countries with large debts, such as Ghana and Mauritania, are less exposed to Chinese debt, Montana pointed out, while Ethiopia, Cameroon, Kenya and Uganda borrowed more heavily from China, but have a lower 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 could alleviate the debt crisis.
Angola joined the G-20 DSSI (Debt Service Suspension Initiative) and granted a temporary suspension of repayments to bilateral creditors following the pandemic. It has also restructured a significant 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 use the “three-year breathing space” granted by the debt relief program from its Chinese loan commitments of more than $ 20 billion. . CNBC contacted the government of Angola for comment.
“I would consider Angola to be exposed to a long-term threat of economic decline due to an excessive dependence on its faltering oil sector, but in the medium term as the risk of sovereign default due to the government’s debt relief and loan restructuring, together with continued multilateral support. ‘