THUR, NOVEMBER 15 2018-theG&BJournal- Moody’s has published a report showing that while the increase in Chinese lending to Sub Saharan Africa has the potential to support economic growth, it also amplifies credit risks for African countries with already high debt burdens and deteriorating external positions..
“Unless African investment financed by Chinese loans generates substantial economic gains that boost debt servicing capacity of Sub-Saharan African governments, the credit implications of such lending include higher debt burdens, weaker debt affordability and weaker external positions,” said David Rogovic, a Moody’s Assistant Vice President – Analyst and co-author of the report. “China’s willingness to renegotiate existing loans and the terms of these renegotiations will influence credit trajectories in Sub-Saharan Africa in the coming years.”
Several policy initiatives have seen China take a larger role in global lending, including its Belt and Road Initiative, a memorandum of understanding signed with the African Union in 2015 to focus on railway, highway, port projects and industrialization, as well as funding committed as part of the Forum on China-Africa Cooperation (FOCAC). At the 2018 FOCAC summit, China pledged an additional $60 billion to African governments over three years in the form of various loans and commitments.
Since these initiatives, Chinese lending to SSA governments has increased tenfold to more than $10 billion annually between 2012 and 2017, from less than $1 billion in 2001
The report findings shows that like any infrastructure-related borrowing, unless the lending generates substantial economic gains boosting debt servicing capacity, credit implications will include higher debt burdens, weaker debt affordability and weaker external positions
Angola (B3 stable), Republic of the Congo (Caa2 stable), and Zambia (Caa1 stable) are among the most indebted to Chinese creditors; while in Ghana (B3 stable), Angola, Zambia, and Nigeria (B2 stable) interest payments already absorb more than 20% of revenue.
Relative to the size of their respective economies, Chinese lending is largest in the Republic of Congo, Ethiopia and Angola. In the Republic of the Congo, Chinese loans make up the largest component of government debt, as bilateral loans from China have partly financed infrastructure projects. And more than half of Angola’s external debt is owed to China as the latter has provided extensive loans since the end of the Angolan civil war in 2002. In Zambia and Kenya, Chinese debt makes up around a quarter of external debt as China financed the Kafue Gorge hydropower project in Zambia and construction of the Standard Gauge Railway in Kenya.
Less transparent terms and debt sustainability conditions attached to China’s loans also weigh on SSA sovereigns’ fiscal strength, with many servicing debts with a natural resource that could fall in price, according to the report.
Some SSA sovereigns face large bond maturities early next decade, so the scope to renegotiate some outstanding Chinese loans will influence their liquidity risks.
The report also comes with some stark warnings. It says ‘’a further increase in China’s lending – or even maintaining the current pace of lending – should go some way to addressing Africa’s financing gap. However, the lack of transparency over the conditions attached to Chinese lending and a lack of reform and governance requirements, compared with those required by multilateral official creditors, may limit the long-term benefits.’’
‘’In some cases, where Chinese lenders have provided liquidity relief, this has come with higher resource concessions, which reduce future export earnings. Even if debt restructuring alleviates immediate liquidity pressure, the loss of natural resources revenue or other assets is credit negative.’’
Moody’s expects that the China-financed infrastructure investment should provide boost to long-term economic growth. This investment should support economic growth and incomes by partly remedying the region’s very large infrastructure deficiencies,’’ it says.
The African Development Bank (AfDB, Aaa stable) has estimated that total infrastructure investment needs in Africa amount to $130-170 billion per year if universal access is to be achieved by 2025 for major infrastructure such as power, transport, water supply and sanitation. The total financing gap, or the difference between infrastructure investment needs and committed financing, is estimated at $67.5-107.5 billion a year.
A substantial amount of this financing has been directed to infrastructure investment. According to the Infrastructure Consortium for Africa (ICA), between 2012 and 2016, China was the third largest source of infrastructure funding and the single largest sovereign lender for infrastructure projects in Africa, behind African national governments as a group and ICA members. Most Chinese lending has been directed to infrastructure investment, in particular the power, transport, and communication sectors.
Moody’s noted that beside the direct and short-term growth impact of investment, bridging the infrastructure gap is crucial to unlocking growth potential and facilitating economic development in the region including by more productively tapping abundant natural resources.
SSA countries in general are less competitive than countries in other developing regions. According to the Global Competitiveness report 2017-18, poor infrastructure is listed as the second most distinctive constraint, after technological readiness, compared with the global average.
More than half the countries in the region rank 100th or below out of 137 surveyed countries in terms of infrastructure quality. In general, poor quality of infrastructure is a key rating constraint in many countries, lowering our assessment of economic strength.
For instance, unreliable and expensive cost of electricity continues to inhibit the development of larger manufacturing sectors, while poor road and transportation infrastructure increases the cost of trading across borders, weighing on overall competitiveness.
Chinese financing typically comes without the requirement for broader structural reform that often accompanies official sector finance and can support potential growth by enhancing governance and competitiveness and by crowding in further investment. For example, World Bank and EU development assistance is often linked to compliance with objectives related to governance, socio-economic development, and democratic principles. The absence of such conditions attached to China’s lending likely limit somewhat the broader and longer-term growth benefits from investment.
The terms and conditions of Chinese loans and the projects that they finance are often less transparent than those of other lenders, Moody’s noted.
‘’Increased transparency can spur other official and private investment into the country. For example, an IBRD (World Bank Group) loan requires the recipient government to submit financial statements and evaluation reports and hire bank-approved experts to monitor transparency and efficiency of investment and compliance with safeguard policies. Similarly, IDA’s non-concessional borrowing policy, among other things, sets ceilings on non-concessional borrowing and engages in capacity building in areas like debt management.’’
The amount of lending is determined in part by a country’s rank on the Country Policy and Institutional Assessment (CPIA), which measures the quality of policies and institutional arrangements. Chinese loans do not come with similar disclosures from the borrowing countries, limiting their catalytic effects.
There are also the negative implications of additional lending for fiscal strength and external vulnerability. Like any investment, unless the investment financed from Chinese loans generates sufficient economic returns, at least over the medium term, to support the additional debt service obligations incurred, the principal credit implications of such lending are credit negative, including higher debt burdens, weaker debt affordability and in some cases weaker external positions. The efficiency of investment choices is closely related to the strength of institutions, which tends to be low in most SSA countries, as well as readily available financing, which may induce governments to borrow for inefficient investments.
Inefficiencies in the public investment process can limit the economic gains from large infrastructure investments, and therefore contribute to permanently higher government debt loads.
IMF research suggests that low efficiency, due to poor project selection or weak implementation for instance, can reduce the long-term economic gains. Even where the investment may ultimately enhance growth, debt repayments related to infrastructure may start before the project generates returns, requiring the government to manage a higher debt service burden for some time.
For countries with weak institutional frameworks, the additional administrative burden and time required to meet the requirements imposed by International Financial Institutions may encourage borrowing from Chinese creditors with less onerous requirements related to loan preparation, appraisal, or disbursements.
‘’If this is the case, borrowing can rise faster than debt sustainability considerations would imply. For example, in Kenya, the World Bank noted the rapid accumulation of debt from China, particularly when lending is non-concessional, can cause an overall increase in debt to unsustainable levels.’’
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