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, on Tuesday, October 9, 2018
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After Zambia became the first non-performing debt of the coronavirus era on the African continent, analysts wonder whether nations heavily dependent on Chinese loan financing would be likely to incur debt.
The Covid-19 pandemic has caused difficulties for a number of sub-Saharan African countries that in recent years have borrowed substantial loans from China to finance major infrastructure projects, exacerbating pressures from a slowdown. of the continent’s economic growth and falling commodity prices.
Zambia became the first country on the continent to formally default on its debt in November 2020, and opted for a repayment of $ 42.5 million.
As Africa’s second-largest copper producer, falling copper prices in recent years have made its $ 11 billion debt pile increasingly difficult to manage, but concerns have also arisen from Eurobond investors. on the transparency of their Chinese loan payments.
What we learned from Zambia
“The popularity of Chinese creditors has created a more diverse creditor base than the historic bilateral lenders primarily of the Paris Club, which complicates the resolution of amortization disputes,” said Aleix Montana, a researcher at Verisk Maplecroft, in a report recently.
Montana said the Zambia case indicates that beyond the size of the debt, the composition of creditors also plays a role in determining debt risk. Concerns about transparency make Western bondholders more likely to reject possible debt relief packages in countries borrowing from China, for fear that debt relief will be used to repay loans. Chinese.
Resource loans are 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, commodities are used as a means of amortization or guarantee, Montana stressed. Loans are often based on the future production of resources such as cocoa, tobacco, oil or copper.
A man wearing a face mask selects clothes at a market in Lusaka, the capital of Zambia, on August 18, 2020. Confirmed cases of Zambia’s COVID-19 have continued to rise, with a total number close to 10,000.
Xinhua / Martin Mbangweta via Getty Images
“Amortization agreements based on the future value rather than the quantity of a commodity are especially risky for the borrower, as a decrease in commodity prices on the world market would require an artificial increase in their production to cover the debt obligations, ”Montana said. .
Zambia has now called for debt treatment under the common framework of the G-20 (Group of Twenty), which aims to provide the poorest nations with transparent playing conditions to restructure or reduce unsustainable debt obligations. .
“Zambia is committed to the transparency and equal treatment of all creditors in the restructuring process and our request to benefit from the common framework of the G20 we hope will reassure all creditors of our commitment to this treatment. “Finance Minister Bwalya Ng’andu said in a statement.
Oil producers and “resource-backed” loans
Montana expressed concern about high levels of debt in oil-exporting countries, such as Angola and the Republic of Congo, which have seen their national currencies devalued in recent years by the sharp drop in oil prices.
This makes foreign currency-denominated repayments relatively more expensive, while the use of reserve-based loans also exacerbates countries ’risk of debt distress, Montana suggested.
The United Nations Economic Commission for Africa (UNECA) has also stressed that Angola and the Republic of the Congo are especially at risk.
“Apart from being two of the countries with the highest risk of public debt and economic growth in our indices, they are two of the countries that have borrowed the most from China,” Montana said.
The combination of the external economic recession, persistent high debt levels and a substantial proportion of resource-guaranteed loans make Angola uniquely vulnerable, he said.
“The case of Angola is of particular concern, as it is estimated that about 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 boost state-owned enterprises.”
Montana suggested Angolan businesses and investors can expect credit ratings to deteriorate further, suggesting that a sufficient recovery in oil prices may not come soon enough for the country to meet its debt restructuring obligations by 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 the price of crude oil, which accounts for 70 percent of government revenue, and the failure of the authorities 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 said, while Ethiopia, Cameroon, Kenya and Uganda have borrowed more from China, but are at lower risk of default.
However, Pangea-Risk CEO Robert Besseling told CNBC that some of the measures taken by Angola since the start of the pandemic should alleviate concerns about debt distress.
Angola has joined the G-20 DSSI (Debt Service Suspension Initiative), granting a temporary suspension of repayments to bilateral creditors in the wake of the pandemic. It has also restructured a considerable amount of Chinese debt and continues “in the IMF’s good books, at least for now,” Besseling said.
Angola’s finance minister, Vera Daves de Sousa, told a Reuters conference in January that Africa’s second-largest oil producer would try to take advantage of the “three-year breath” provided by the country’s relief program. debt with its $ 20 billion more in Chinese loan obligations. CNBC has contacted the Angolan government for comment.
“I would consider Angola to be exposed to a threat of long-term economic decline due to excessive dependence on its hesitant oil sector, but with a mitigated risk of sovereign default in the medium term due to relief of government debt and loan restructuring, alongside continued multilateral support. “