Africa: Going cold turkey from Chinese infra finance addiction?

Africa has been at the heart (and origin) of man’s progress for circa 300,000 years. With abundant natural resources and a vast land mass made up of 54/55 countries, the continent has long played host to the futile endeavour of man’s colonial ideal – to ‘civilise the uncivilised’. And what history has taught us, from Alexander the Great to Belgian’s Leopold II, is the gulf between the ideal and reality of colonialism is far too often overlooked in the name of public opinion.

The ‘emissaries of light’ referred to in Joseph Conrad’s novella of 1899 Heart of Darkness, a political satire on the hypocrisy of colonialism, inevitably end up being more barbaric and devoid of the moral code they wished to instil in the indigenous people they were supposedly trying to civilise.

Why is this relevant to the trade, export and project finance space in Africa I hear you ask? Well, several critics – like Grant Harris, Barack Obama’s former adviser on Africa – have dubbed China’s presence in Africa as ‘neo-colonisation’. Terms such as ‘predatory lending’ have become commonplace for anti-China politicians against the heavy debt piles China continues to extend to African economies for infrastructure and natural resources.

“Chinese debt has become the methamphetamines of infrastructure finance: highly addictive, readily available, and with long-term negative effects that far outweigh any temporary high,” says Grant. “Massive loans can come with steep and opaque conditions.”

China’s president, Xi Jinping, pledged $60 billion in 2018 for African development over the next three years while countering criticism that Beijing is trying to ensnare African governments in a debt trap. Beijing may well be lending the money to Africa in the knowledge at least some of the loans will in all likelihood be unpaid, but only the truly cynical believe the world’s second largest economy proceeded on the presumption that its access to Africa’s markets, enhanced influence, and ability to exploit the continent’s rich deposits of natural resources would compensate it for any unpaid loans.

Sovereign risk and commodities-linked debt 

Last month the World Bank’s president David Malpass expressed concern about the amount of debt some of Africa’s economies were piling on. In particular, he worried about the lack of transparency in some of the loan deals being struck with China.

Africa’s debt load has soared some 150% to over $583 billion in 2018 from $236 billion 10 years earlier, according to World Bank data. A sizable share of that debt in Africa is resource-backed loans which are linked directly between the resource producer and the lender — more often than not China in recent years. A recent report from the Natural Resource Governance Institute (NRGI) examined 52 resource-backed loans made between 2004 and 2018, with a total value of more than $164 billion—30 of them, with a combined value of $65.8 billion, were made to sub-Saharan African countries.

More than half the total amount of loans to sub-Saharan African countries examined in the report came from China Development Bank and China Eximbank to Angola ($21.4 billion); Ghana ($3 billion); Niger ($1 billion) and Sudan ($3 billion). The remainder was mostly provided by international commodity traders to oil producers Chad ($2 billion), Congo Brazzaville ($5.1 billion) and South Sudan ($1.3 billion).

“African leaders have often taken out these loans to help with their own short-term political ambitions, but their countries have ended up severely indebted and with the risk of losing collateral worth more than the value of the loan itself,” says Evelyne Tsague, an NRGI Africa co-director.

This point is only amplified amid the recent record low oil price drop globally. Although, resource-backed loans in principle are not necessarily a bad thing by any means. Most of the deals are in fact linked to specific infrastructure projects for example, so if executed as laid out on paper they could help shorten the path to closing the African infrastructure gap estimated to be around $90 billion a year.

But it is the lack of transparency with these bilateral deals that concerns bodies like NRGI and the World Bank, particularly with the oil producers. “These deals, sometimes labelled as oil advances, often resemble pay-day loans,” says David Mihalyi, co-author of the report and senior economic analyst with NRGI. “They have short maturities, high interest rates and fees, and no commitments on how the money will be used.”

And if any more evidence of the riskiness of some big deals was needed, the global economic crisis prompted by the coronavirus pandemic has sparked an unprecedented stress test for oil-dependent African nations. 

According to TXF Intelligence’s Export Finance Market Survey this month, which surveyed over 300 export finance practitioners to garner the impact of the Covid-19 crisis on ECA business, over two-thirds of respondents  (67%) said Africa will be one of the most severely hit region in the world, alongside North America and Europe. 

The downturn in global demand for oil and the subsequent supply glut has already marked the lowest oil prices in the last 20 years, and this has in turn disrupted the budget plans of major oil producing countries in Africa. Consequently, there is a significant risk to trade banks and commodity-linked corporates exposed to sovereign risk, especially in counties such as Nigeria which has a 2020 budget based on revenue from with oil priced at $57 per barrel. Prices have now dropped to between $10 and $25 per barrel.

These price drops could have even more significant impact for certain other countries where high-profile oil sector resource-backed loans were seen as being the gateway to economic sanctuary. And with the IMF and ECAs starting to wipe off portions of debt for many African countries, the question is: will China follow suit to help mitigate the economic fallout? 

For now, China, India and the US have said they will not provide any debt relief to African countries amid the Covid-19 crisis, however they have not written off debt restructuring. Kenya, Ethiopia and Nigeria have the greatest debt with China, according to market observers, with Kenya rumoured to be the most likely to renegotiate, as 53% of its external debt is owed to China. Nigeria is perhaps the least likely to restructure its debt with China, having received the greatest support from the IMF on the continent. 

Now time to get up to speed on the markets.
Here's our exclusive TXF in depth articles

Shop talk: Squire Patton Boggs ups commodity finance capacity in Asia
A few months after the launch of Squire Patton Boggs’ shipping and commodities group, headed up by partners Jessica Kenworthy and Barry Stimpson, TXF caught up with the pair in Singapore to outline the opportunities and obstacles in establishing the law firm in new markets amid a turbulent time for the global commodities industry.

Sustainable deals in spotlight: Ivory Coast hospital
In the second edition of TXF’s new Deal in Spotlight feature, TXF spoke with Thierry Gernigon, director of export finance EMEA at BNP Paribas to discuss a Bpifrance-backed deal the French bank closed at the end of 2019 to finance the rehabilitation of a university hospital centre in Ivory Coast.

Keynote: US Exim’s Renna on when the rubber hits the road
Stephen Renna, chief banking officer at Export-Import Bank of the US talks to TXF about US Exim’s response to Covid-19 as it hits the ground running following full reauthorisation. How is US Exim filling the gaps left by the private capital market in both guarantees, working capital support and SCF? What about cooperation with other ECAs when the hard work of recovery really starts?

Impact assessment: Investigating leadership and Covid-19
In the first of a series of insights on the impact of Covid-19 on the global economy, Orbian CEO Tom Dunn interviews Archie Brown, Emeritus Professor of Politics at Oxford University. How important is the role of the ‘leader’ in the crisis?

Exclusive TXF Tracker and Originals content

RFPs for Facility E IWPP due by month-end
Prospective bidders will submit RFPs for the 2.5GW Facility E independent water and power producer (IWPP) project in Qatar by 30 April, after the deadline date was postponed several times.

EWEC to appoint Al Dhafra solar IPP preferred bidder this month
A preferred bidder for Emirates Water and Electricity Company’s (EWEC) 1.5GW Al Dhafra solar IPP is expected to be announced this month.

Thai cogen power plant closes
Sponsors of the 92MW Nexif Energy Rayong small power producer gas-fired plant in Thailand – Nexif Energy Thailand (51%) and Thai infrastructure developer RATCH Group (49%) – closed a $60 million non-recourse loan to fund the project on 21 April.

Hispasat Canarias close on satellite buyer's credit
Hispasat Canarias has reached financial close on a €129.2 million buyer's credit for its new Amazonas 6 telecommunication satellite.

REPDO sets Round Three tender deadlines
Saudi’s Renewable Energy Project Development Office (REPDO) has set October 7 as the bidding date for the two Category A solar schemes in its Round Three tender – the Wadi Ad Dawasir 120 MW Solar PV IPP and the Layla 80 MW Solar PV IPP.

Energia Sierra Juarez II wind farm financing delayed
Financial close for joint sponsors of the 108MW Energia Sierra Juarez II wind farm in Mexico – IEnova and Saavi Energia – has been delayed until May this year. The deal was expected to close mid-March.