A difficult balancing act for China as creditor
Posted on 18th September, 2020 in Corporate News
Image Credit: Yvonne, African market
Negotiations over the sovereign debt of developing countries were much simpler at the time of the Heavily Indebted Poor Countries (HIPC) initiative, launched in 1996 with the Multilateral Debt Relief Initiative. Governments borrowed from the Paris Club of Western official creditors or from the multilateral agencies, led by the IMF and the World Bank. In a minority of cases, there were additional obligations due to the London Club of commercial banks.
Today, as debt sustainability has a place in the centre of the stage and some campaigners for debt cancellation have dusted off their placards, talks theoretically involve literally involve hundreds of Eurobond holders. In practice, debtor governments have applied for relief under G20’s Debt Service Suspension Initiative (DSSI) but have declined to seek “comparable treatment” from private creditors for fear of the impact on their credit ratings and their access to the market.
The other huge change since the launch of HIPC is the emergence of China, which has lent an estimated US$150bn to African governments and state-owned enterprises. This represents 20 per cent of the stock of sovereign African debt. The complications arise because China is a member of G20 but not of the Paris Club. It has embraced the DSSI, which offers to defer all bilateral debt service due from its launch in April until the end of this year. However, its loan agreements are often opaque and do not follow the guidelines of the Paris Club.
Chinese exposure is heavily skewed towards a small number of countries. In the case of Angola, Chinese loans account for 45 per cent of the country’s external debt of US$49bn according to central bank data. Future disbursements under an IMF programme and sovereign Eurobond valuations hinge therefore upon the progress of talks between China and Angola over a deal under DSSI. Other sizeable debtors on the continent include Mozambique, Congo (Brazzaville), Djibouti and Ethiopia. In contrast, Exim Bank of China loans represents a more typical 10 per cent of Nigerian sovereign debt.
Another complication to air rather than discuss is the grey line between the Chinese public and private sectors. Some loans could be classified in either category so the figure of US$150bn for total exposure may prove conservative.
The pressures on low-income country finances have exposed the Chinese government to criticism from finance ministers and civil society. Praise is rightly due for financing and building the transformative, standard gauge railways from Mombasa to Nairobi, and from Addis to Djibouti. However, now that repayments have become challenging with the constraints of life with Covid-19, some questions are being asked of the loan terms. Were the agreements properly negotiated and what recourse was available to the lender in the event of default?
There is one reason for the current fiscal pressures that is not peculiar to China. This was the popularity of the ‘sovereign obligor structure’ until about 12 to 18 months ago. Armed with a sovereign guarantee from the borrower and in a world of cheap money internationally for recycling, the creditor often paid less than full attention to the repayment prospects. Several chickens, both Chinese and non-Chinese, have now come home to roost at the same time.
Peculiar to China is the lack of transparency. We remember having a sneak look at a loan agreement between China and the DRC government from the late noughties. In this private document we read that China could take control of mining assets and even government housing if the Congolese stopped making repayments.
The story has moved on, of course. At a session at the annual meetings of the African Development Bank in Malabo last year, the Chinese deputy governor to the bank made the point that her government was relatively new to the world of development assistance and that it was moving towards international practice. She added that it was not always appropriate to import Chinese labour, a reference to the rebuilding of the Benguela railway.
18th September 2020