Geopolitics by Debt? The ChinAfrica relationship
Global - Apr 10 2019
- #credit risk
- #sovereign debt
- Credit Risk
- Sovereign Debt
Geopolitics by Debt? The ChinAfrica relationship
Since 2018, there have been increasing concerns about sovereign risk in Africa. Indeed, the International Monetary Fund (IMF) in its April fiscal monitor report[1] warned that Africa is heading towards a new debt crisis, following a previous one in the 1980s. The World Bank classifies 18 African countries at high risk of debt distress, as their debt-to GDP ratios surpass a 50% threshold—the level at which debt is generally considered high for developing countries. These warnings came after Mozambique’s default on its external debt in 2017, confirming the debt issue in Africa. While the current situation resembles the 1980s African debt crisis (an accumulation of foreign-currency denominated debt), two important differences should be highlighted: (i) the 1980s debt crisis was fuelled by a greater share of concessional debt (i.e. debt loaned by the IMF, the World Bank or other Policy-Driven Institutions), while today, more of sub-Saharan Africa’s debt is private; (ii) China was not a major creditor to Africa in the 1980s, while today it is the largest single creditor nation, with combined state and commercial loans estimated to have been 132 billion USD between 2006 and 2017[2].
This second difference is important, as China has invested significant capital in Africa, mainly through its Export-Import Bank (67% of Chinese loans between 2000 and 2015 to African countries were funded by the Eximbank, according to the China Africa Research Initiative, CARI). Increasing Chinese loans have then led the rising debt-to-GDP ratio in the region, as the accumulation rate of the debt was faster than the GDP growth rate during this period.
We have tried to evaluate the impact of this evolution on the Sub-Saharan creditworthiness, by computing an average quantitative indicative rating for (i) the five Sub-Saharan countries most indebted towards China[3], and (ii) the Sub-Saharan countries overall[4]. Figure 1 shows the evolution of these average quantitative indicative ratings and the surge of Chinese loans in 2016. We observe a fall of the most indebted countries’ average quantitative indicative rating at the same time, and a widening gap between the two plotted average quantitative indicative ratings. This gap was up to 4 notches, which is consequent in terms of creditworthiness.
Fig. 1 African Countries Creditworthiness and Chinese Loans
Sources: Beyond Ratings, China Africa Research Initiative, Johns Hopkins University School of Advanced International Studies
Given this fact, a first question to ask should be why did China loan so much to these Sub-Saharan countries?
Some answers can be found regarding the main recipient sector of the Chinese loans. As highlighted in Figure 2, most loans are dedicated to infrastructure (transport and communication) and natural resources (agriculture, mining and power).
Fig. 2 Chinese Loans by Sector in the 5 Most-Indebted Sub-Saharan Countries
Sources: Beyond Ratings, China Africa Research Initiative, Johns Hopkins University School of Advanced International Studies
Indeed, according to Yun Sun, an analyst from the Brookings Institute, “much Chinese financing to Africa is associated with securing the continent’s natural resources […] using what is sometimes characterized as the Angola Model”. This model consists in providing low-interest loans, with commodities such as oil or mineral resources as collateral. As China’s rapid economic development has required an equally remarkable amount of natural resources for fuel, these loans are a way to secure its commodities needs. Meanwhile, the incentive for Chinese loans to the infrastructure sector can be twofold : (i) creating business opportunities for Chinese construction companies, as Beijing requires that infrastructure construction favours Chinese service providers in exchange for the loans[5]; (ii) expanding the Angola Model to infrastructure-backed loans can help China to increase its geopolitical power (for example, 77% of the debt of Djibouti, home of the most significant American military base in Africa, is from Chinese lenders), and to favour the development of the Belt and Road initiative.
The rising sovereign risk in Sub-Saharan Africa can, therefore, be partly linked to increasing Chinese loans. These swelling Chinese loans meet geopolitical objectives and go beyond the purely financial risk-return framework. While Sub-Saharan country debt is probably not sufficient to trigger a global financial crisis, the approach adopted by China could warrant financial markets’ scrutiny, especially if such approach should be adopted in other regions of the world.
Thomas Lorans, Economist
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[1] https://www.imf.org/en/Publications/FM/Issues/2018/04/06/fiscal-monitor-april-2018
[2] https://www.bbc.com/news/world-africa-45916060
[3] Namely Angola, Ethiopia, Kenya, Congo (Brazzaville) and Zambia. According to the CARI database, Sudan is the 5th most indebted African country towards China, but as it is currently absent from our (expanding) quantitative sovereign risk model, we replaced it with Zambia.
[4] Namely Angola, Benin, Bostwana, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo (Brazzaville), Congo (Kinshasa), Cote d’Ivoire, Ethiopia, Gabon, Ghana, Guinea, Kenya, Malawi, Mali, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Togo, Uganda, Zambia.
[5] http://www.ft.com/cms/s/0/908c24f2-2343-11dc-9e7e-000b5df10621.html#axzz2RtN8dPxR