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OPINION
China's loans to South Africa (I)
Charles Collocott |
22 January 2019
Charles Collocott examines our debt situation, and explains why we should look at other country's experiences
China's loans to South Africa – Brief I
22 January 2019
INTRODUCTION
In this brief I will give a short review of the overall debt risk currently facing South Africa, followed by a summary of the Chinese loans taken on so far and the reasons given by government for refusing to disclose the terms. I close the brief by laying the grounds for enquiries into the experiences other countries have had with Chinese debt – in order to see what South Africa can possibly learn from them.
THE GENERAL DEBT RISK PICTURE
When a government’s borrowing is not accompanied by sufficient economic growth and revenue generation to service its debt, this can result in a downward spiral that ends with debt restructuring and bailouts.[1]
According to a study by the World Bank on a sample of 79 countries, the threshold debt-to-GDP level is 77.1%. Beyond this, each additional percentage point in debt-to-GDP costs the economy 0.0174% in annual real growth.[2] A more recent study, by the Centre for Global Development, shows a statistically significant threshold effect in countries with rising debt-to-GDP ratios above 50-60%, where growth drops off and leads to default or debt restructuring.[3] South Africa falls into this category, with its debt-to-GDP ratio almost doubling from 27.8% in 2007 to 53.1% by 2017.[4]
Adding to South Africa’s concerns are the current levels of debt held by the state owned enterprises (SOEs), and critically not just the government guaranteed debt; with cross-default clauses in place within the SOE loan agreements, if for example Eskom were to default on its payment to just one debtor, this would trigger an automatic recall on the loans to all its debtors. On that basis, all Eskom’s debt is effectively government guaranteed, because government cannot allow the parastatal to go into liquidation through a triggering of the cross-default clause. Therefore, a highly conservative assumption would be that the only SOE debt government is liable for, is the debt which it has guaranteed.
The latest reported total guaranteed debt figure is R670 billion, with R350 billion held by Eskom alone.[5] Adding the recent R411 billion in Chinese loans would take the total figure to around R1 081 billion – making up 87% of the government’s revenue, and 23% of GDP.[6] If this total of R1 081 billion was called upon, this would push the debt to GDP ratio to 69.95% - assuming pre-existing debt and GDP remained constant.
The primary concerns around South Africa reaching unsustainable debt levels are that it will impede sound public investment, reduce economic growth,[7] and do significant damage to citizens’ livelihood.[8]So far in 2018, government has taken a series of three loans from China, totalling R411 billion.
If included on government’s books, this would make up 12.5% of the R3.293 trillion total debt.[9] So there can be little doubt that the sheer size of the recent Chinese loans alone has added a significant amount of additional risk to South Africa’s budget.
THE LITTLE WE KNOW ABOUT THE CHINESE LOANS AND GOVERNMENT’S ARGUMENTS FOR NON-DISCLOSURE
With regard to the latest and largest tranche of R370 billion, said to be earmarked for an economic stimulus package, government refuses to divulge any information about it – not the currency, what it will be spent on, interest rates, repayment period, etc. Adding to the abstruseness is that government officials have repeatedly called the R 370 billion ‘a gift.’
However, officials have also made mention of the ‘not exorbitant’ interest rate attached.[10] A gift with interest payments that accrue to the giver is a strange gift indeed. Hence, we feel it safe to assume that it is indeed a loan. Also odd was the Finance Minister, Mr. Tito Mboweni’s responsewhen he was asked by parliament’s Standing Committee on Finance, ‘why the terms were being kept so secret?’ He responded with:
“I understand the concerns that the committee has regarding the loan ... However, China are our friends. It is very difficult to set rules when it comes to friends and money.”[11]
We know that an earlier tranche of R37 billion was loaned to Eskom. It is in US dollars and will thus need to be paid back in US Dollars, which adds exchange rate risk. This loan is to help Eskom finish the Kusile power station, has a grace period of 5 years and repayment begins thereafter in 20 instalments over 10 years.
In response to questions in parliament for further information, such as interest rates and if it has been securitised, President Ramaphosa said the conditions of the loan agreement could not be made public due to confidentiality clauses, and that further disclosure would place Eskom in a disadvantageous position when seeking further funding from the markets.
However, there cannot possibly be any way in which non-disclosure of investment terms will not increase real and perceived risk for possible future investors. This is because withholding material information for any investment by default increases the risk of that investment. There are therefore three other possible reasons for non-disclosure of the terms. First is that the Chinese debt may have been given seniority status in repayments, making current and future creditors to Eskom subordinate and more at risk, and government (wrongly) thinks not disclosing this is the better option.
Second and similar to the first, is that the loans may have been secured using Eskom’s assets, also making future investments more risky and less attractive; and again government is misdirected in its reasoning for nondisclosure. The third possibility is that the terms are so massively skewed in China’s favour, that government simply does not want to disclose them in fear of a public backlash leading up to the general elections.
Finally, the R4 billion tranche was loaned to Transnet and will be used for operation expenses and capital expenditure. It is a five year Rand denominated loan that will be paid back quarterly at a floating and undisclosed interest rate.[12]
THE BASIS GOING FORWARD
With South Africa at risk of reaching or having reached a threshold level of debt-to-GDP, it is important to have a clear picture of the implications of any additional debt burden. Unfortunately, given the secrecy surrounding the recent Chinese loans, this is currently not fully possible. Further adding to the fog is that in contrast with other major creditors, China does not formally participate in multilateral mechanisms, such as the Paris Club, in dealing with sovereign loans and defaults. Chinese debt relief is done in an ad-hoc, case-by-case basis, and as such there is no guiding framework to define China’s approach to debt relief and restructuring. We must therefore rely on anecdotal evidence.[13]
So to try and gauge a range of potential outcomes, my next two briefs will look at the experience six other countries have had with taking on Chinese debt, the fourth brief will look at how those experiences could or should be applied to South Africa, and the final brief will include ancillary matters as well as an overall conclusion.
Charles Collocott is a Researcher at the Helen Suzman Foundation.
Correction made 24 Jan 2019.
[1]John Hurley, Scott Morris, and GailynPortelance. 2018. “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for Global Development, at 2.
[2]"Finding the tipping point -- when sovereign debt turns bad" (English) | The World Bank
[3] Op cit note 1 at 11.
[4]South Africa Government Debt to GDP | 2019 | Data | Chart | Calendar
[5] Medium Term Budget Policy Statement 2018, National Treasury, Republic of South Africa.
[6]Main budget: Revenue, expenditure, budget balance and financing; 2001/02 to 2020/21 from www.treasury.gov.za
[7] Op cit note 1 at 3.
[8] Ibid.
[9]https://www.nationaldebtclocks.org/debtclock/southafrica accessed on 14/01/2019; total debt excluding the Chinese loans of R411 billion came to R2.882 trillion.
[10]China gifts SA with R370bn
[11]MPs grill Treasury over Eskom China loan 'secrets'
[12]Revealed: Cyril Ramaphosa details how SA will repay Chinese loans
[13] Op cit note 1 at 19.
China's loans to South Africa (II)
Charles Collocott |
24 January 2019
Charles Collocott on the experiences of Sri Lanka, Pakistan and Argentina
CHINA’S LOANS TO SOUTH AFRICA - BRIEF II
The first brief gave an overview of South Africa’s debt situation, how the loans from China fit into this, and why we need to look at the experiences other countries have had with Chinese debt. The third brief covers the experiences of Zambia, Kenya and Ethiopia, while the fourth brief summarises the lessons learned from the countries analysed. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.
SRI LANKA
The Hambantota Port in Sri Lanka is the most vivid example of China’s use of debt in gaining global influence, and how forceful it can be in reclaiming what is owed.
Following the 26 year civil war, China became an indispensable partner to Sri Lanka’s government. Due to accusations of human rights violations in the final years of the war, Sri Lanka became heavily reliant on China for economic, military and political support, while India remained a key trading partner throughout.
When the war ended in 2009, President Rajapaksa and his family were in control of numerous government ministries, and around 80% of government spending. So when the president decided to build a large port in his home district of Hambantota, little could stop him. Feasibility studies on the port indicated it would not work, and lenders such as India refused to advance any loans. The Chinese government’s Export-Import Bank (Exim) then agreed to the first loan of $307 million.
Typical of most Chinese infrastructure loans, a condition was that a Chinese state owned company, China Harbour, was to build the port. Other strings attached had to do with the geostrategic position of the port, and not only in relation to its position to Chinese competitor, India; in 2014, on the same day Prime Minister Shinzo Abe of Japan was visiting Sri Lanka, Chinese submarines docked in the harbour.
From the start, officials questioned the wisdom of a second major port when the main port in the capital was thriving and had room to expand. As predicted, the port failed to attract enough business and was an economic failure. The initially moderate lending terms become more onerous as timelines and additional financing had to be renegotiated. Interest rates moved from a variable 1-2% to a fixed 6.7%. In comparison, interest charged on Japanese infrastructure loans are below 0.5%.
In order to get debt to manageable proportions, the Sri-Lankan government looked to remove around $1 billion in debt off their balance sheets. To do this, the only terms that could be agreed upon was to hand over 85% of the port’s equity to China, as well as 15 000 acres of surrounding land on a 99 year lease. This however was possibly not the only assault on Sri Lanka’s sovereignty resulting from Chinese debt.
In the run up to the 2015 Sri Lankan elections, it was reported that the Chinese, eager to keep Rajapaska in power, transferred over $7.6 million from China Harbour’s bank account in support the incumbent’s campaign.
The effort failed and a new government came into power, with a mandate to scrutinize Sri Lanka’s financial deals with China. The new government tried to reorient toward India, Japan and others, but soon realised that they could not fill the economic space of China. There was no choice but to keep taking Chinese loans ‘until economic discipline is introduced,’ said the new finance minister.[1] At the end of 2018 Sri Lanka’s debt-to-GDP was 77%[2] and around 8.7% of total debt was Chinese.[3]
PAKISTAN
As China’s flagship project in its Belt and Road Initiative, the China Pakistan Economic Corridor (CPEC) runs 3 000 kilometre from West China, through Pakistan and ends at the Arabian Sea. The infrastructure required for the CPEC was initially estimated at $46 billion, but its value in mid 2017 came to around $62 billion.
A hallmark of CEPC has been secrecy and a lack of transparency, squashing any attempt at a real cost-benefit analysis and fuelling speculation that the terms may be skewed heavily in favour of China. In fact, all materials (except for cement from Pakistan), equipment and labour are sourced from China.
Furthermore, following the kidnapping and murder of two Chinese nationals by Islamic State in the Pakistan’s Balochistan province,[4] and the fact that since 2003 more than 2 600 people have been killed or wounded in suicide attacks in the area,[5] the Pakistan army have had to raised a new division called the Special Security Division (SSD) in order to protect Chinese nationals working on CPEC.
With the funding coming from from Pakistan’s fiscus, the SSD comprises 9 000 Pakistan Army soldiers and 6 000 para-military forces.[6]
While CEPC will modernise Pakistan’s infrastructure, concern has been raised about Pakistan’s ability to leverage the assets in order to repay the resulting debt.[7] For example, Pakistan has a port similar to Hambantota in Sri Lanka, the Gwadar Port. Gwadar too has a strategic position near the Strait of Hormuz, through which around 40% of the worlds oil passes. The port however does not seem necessary as it has failed to bring in business, and will therefore likely be unable to raise revenue to pay back its debt.[8]
In 2018 Pakistan voted in a new government, also with a mandate to scrutinise the financial deals with China. The former Prime Minister Nawaz Sharif, who championed Chinese funded projects, was jailed for corruption in 2018. But the new government, like the new Sri Lankan government in 2015, has found itself with no choice to but to persist with taking on Chinese debt. The country’s debt-to-GDP ratio is an estimated at 70.1%,[9] and around 20% of total debt is Chinese.[10]
The International Monetary Fund issued a recent report stating that CEPC has been a mixed blessing to Pakistan, in that it has brought in needed investment, but at the same time greatly increased the country’s current account deficit and external debt.[11]
ARGENTINA
In 2001 after being unable to pay its debts, resulting in the world’s largest sovereign default at $100 billion, the Argentinean government was shut out of international credit markets.[12] In 2007 the leftist President Cristina Fernández de Kirchner came into power and set about forging close ties with China, which was not the case for Argentina before.[13]
In 2009 Argentina found itself in another crisis, with high inflation, billions of dollars due in debt payments and public anger over the nationalisation of $30 billion in private pension funds. It was at this point that the government sought China’s help. First was a $10.2 billion currency swap in order to stabilise the peso, and then a promise of $10 billion to fix its dilapidated railways. At the same time secret talks began between the governments around China’s armed forces building a satellite-tracking hub in Argentina’s Neuquén Province. In 2012 and in secret, the Argentinean government agreed to China’s right to the land rent free for 50 years.[14]
In 2015 the centre-right presidential candidate Mauricio Macri won Argentina’s elections, with a promise to restore relations with the United States and Europe. Macri delivered by settling some of the country’s debt problems via a repayment deal to hedge funds. This in turn allowed Argentina re-entry into international credit markets and a record emerging market bond sale of $15.6 billion.[15]
However, prior to this during the final months of Kirchner’s presidency, Kirchner agreed to take on over $20 billion in Chinese loans to finance infrastructure projects. Macri sought to review and possibly cancel these debt agreements, citing their lack of transparency and possible negative impact on the environment.
In 2016 Macri met Chinese President Xi Jinping to discuss the deals, with the outcome of that meeting being that China were ‘willing to revisit [the] agreements’ in order to ‘deepen the relationship instead of reducing it.’ China however had tied Argentina’s hands in the negotiations with a cross-default clause connected to the hydropower dam contracts Macri wanted to cancel. If cancelled, the loans for an important railway project would be halted too. Macri was therefore unable to cancel any of the mega-deals but did manage to renegotiate the terms in order to avoid cost overruns and soften the environmental impact. In this regard China agreed to lower the capacity of the dams.
Argentina also managed to renegotiate the space station agreement, with China agreeing to use the base for civilian purposes only. This was after claims that the former government had given away too much by failing to specify that the base could only be used for peaceful purposes.[16]
While the deals with China have managed to avoid allegations of corruption, former president Kirchner is facing corruption charges for accepting bribes from local construction companies in exchange for public works contracts.[17]
Argentina continues to rely on China as a lender and a major customer for its commodities. Trade between the two countries has quadrupled since 2001, and in the last decade China has financed $18.2 billion in mainly infrastructure projects, with interest rates reported between 3 and 4 percent. The financial ties further extended to currency swaps, which now come to $18.7 billion.[18]
The country’s debt-to-GDP was last report at 50.6% at the end of 2017[19] and estimated by the IMF to have jumped to 65% for 2018.[20] Assuming the above Chinese debt figures represent Argentina’s total debt to China, this comes to 11.3% of total debt in 2018.[21]
Charles Collocott is a Researcher at the Helen Suzman Foundation.
Footnotes:
[1]How China Got Sri Lanka to Cough Up a Port
[2]New Chinese loan may further plunge Sri Lanka into debt trap
[3]Sri Lanka sinks deeper into China's grasp as debt woes spiral, New Chinese loan may further plunge Sri Lanka into debt trap and Sri Lanka - national debt 2022 | Statistic; China holds 10% of total foreign debt of $55 billion, with total debt in 2018 at $63.07 billion.
[4]ISIS Says It Killed Two Chinese Hostages in Pakistan
[5]China's flagship port in Pakistan shackled by heavy security
[6]Pakistan raises Special Security Division successfully - CPEC Latest News
[7]Can Pakistan Afford CPEC?
[8]What’s Happening at Pakistan’s Gwadar Port?
[9]Pakistan’s debt-to-GDP ratio to hit 15-year high | The Express Tribune
[10]Is Pakistan falling into China’s debt trap?
[11]Imran Khan expected to stick with Chinese investments in Pakistan
[12]From a Space Station in Argentina, China Expands Its Reach in Latin America
[13]At the G-20, It's China, Not the US, That Argentina Loves Most
[14] Op cit note 6.
[15]China Made Mauricio Macri a Deal He Couldn’t Refuse
[16] Op cit note 9.
[17]Argentina ex-President Kirchner hit with more corruption charges
[18]UPDATE 1-Argentina expands China currency swap as Beijing eyes Latin America | Reuters
[19]Argentina Public Debt: % Nominal GDP [Data & Charts]
[20]IMF says Argentina debt to peak at 65 pct of GDP in 2018 | Reuters
[21][Up-to-Date] Argentina National Government Debt [Data & Charts]
China's loans to South Africa (III)
Charles Collocott |
24 January 2019
Charles Collocott examines the experiences of Zambia, Ethiopia and Kenya
CHINA’S LOANS TO SOUTH AFRICA - BRIEF III
The first brief was an overview of South Africa’s debt situation, how the loans from China fit into this, and why it is we need to look at the experiences other countries have had with Chinese debt; the second brief considered the experiences Sri Lanka, Pakistan and Argentina have had with Chinese debt; the fourth brief summarises the lessons learned from these experiences. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.
ZAMBIA
China’s loans to Zambia began the 1960s, when the white minority Rhodesian government cut off Zambia’s railway access for its copper to be transported to ports in South Africa. After failed attempts to secure funding from the West because of failed feasibility studies, the Zambian and Tanzanian governments commissioned China to assist fund and build TAZARA; a railway line from the Copper Belt in Zambia to Dar es Salaam in Tanzania.
At an initial cost of $570 million, TAZARA was at the time the single biggest overseas loan ever by the Chinese government.[1] The loan was interest free and not indexed to inflation.[2] Due to the limited amount of foreign currency the Chinese had available, it was agreed that 75% of the $560m was to come from the sale of Chinese goods in Tanzania and Zambia; that is, Tanzania and Zambia would import Chinese goods, and the proceeds from the sale of these goods would be put towards construction expenses. Additionally, mainly Chinese inputs and equipment would be used. Goods into the region from China rose from 0.9% of total imports in 1966, to 22.4% in 1970. The impact on the domestic manufacturers and economies of Zambia and Tanzania was disastrous and the terms of import had to be renegotiated.
During the 1980s and despite the earlier failed feasibility studies, the European Economic Community, several European states and the United States did an about turn and decided to get involved. The Western countries stated that this was to try and lessen the dependence of other Southern African countries on apartheid South Africa. Over the decade a cumulative $200 million in loans was extended to the parastatal.[3]
TAZARA unfortunately has been a financial failure due to substandard equipment, poor management, fluctuations in the copper price[4] and changes to the political-economy. With independence in Namibia and the end of apartheid in South Africa in the 90s, as well the end of the civil wars in Angola and Mozambique, Zambian producers had more transport options available and traffic on the railway line decreased to only 690 000 tons in 2009 from several millions in the 1970s.
In an attempt to revitalise TAZARA China cancelled its debt in 2011; and because it was interest free and not linked to inflation, the real value of the debt had in fact shrunk by over 80%. Then between 2010 and 2012 China extended an additional $81 million in interest free loans for equipment and training.[5] Despite this, and with no current debt figures publicly available, in 2018 TAZARA’s management highlighted the difficulties when reporting gross revenue at $21.32 million and running costs at $34 million.[6]
In recent times further loans and expertise have been extended by the Chinese to the Zambian government for the construction of a power plant, roads, stadiums and industrial parks. According to news reports the current extent of Zambia’s debt to China is not known with certainty, and there have also been reports that Zesco, Zambia’s state owned power company, has been used as security for the loans. Speaking at a recent seminar on Africa-Chinese relations hosted by the University of Johannesburg’s Confucius Institute, Mr. ChaimbaPhiri – MD of Heron Consulting which specialises in investment in Zambia – recalled having asked the Zambian Finance Minister, Mrs. Margaret Mwanakatwe, about reports of Zesco being used as security. Mrs. Mwanakatawe apparently told Mr. Phiri that Zesco was not used for this purpose, and the loans were instead insured through Sinosure – a Chinese state owned export and credit insurance company. A routine search of news reports on the subject however reveals strong speculation within the media that Zesco has been put forward as security.
Economists have expressed concern around the lack of political will shown by the Zambian government in managing its debt, which was expected to rise to 60% of GDP by the end of 2018, compared to 25.6% in 2014 – raising questions of government responsibility in borrowing and insufficient due diligence by lenders. As of June this year, Zambia’s external debt was close to a third of the total, which would see an increase the risk of default if the Zambian Kwacha was to weaken. In the press, Zambian officials dismiss the possibility of default, simply by saying that Zambia has never defaulted. This however is misleading if one considers that less than a decade ago, Zambia had its debt to the World Bank and IMF written off.[7]
KENYA
Centered on transport infrastructure, China has also provided extensive funding and expertise to Kenya in recent times. The largest of these projects has been the Standard Gauge Railway line (SGR) from the port city of Mombasa to Western Kenya. Initially SGR was to also reach Uganda and Rwanda, but Rwanda withdrew citing high costs, and Uganda withdrew due to security concerns, opting instead for a Tanzanian route; in 2008 protestors in Nairobi uprooted a section of the existing railway line and blocked roads, thereby making it impossible for Uganda to receive imports from Kenya, which crippled the economy.
When it comes to inputs for SGR, reports have it that the Kenyan government has negotiated better deals on behalf of Kenyans when compared to other countries. All cement for the SGR was supplied by Kenyan businesses; railway cars were made in Kenya; over 25 000 Kenyans were employed and trained; 33 crossing stations, as well as bridges and tunnels were added to reduce the impact on wildlife; and the National Land Commission doubled its budget for compensation. However, many of these measures still proved controversial, particularly land value estimates, working conditions for Kenyan employees, and the stretches of track in areas with high biodiversity.[8] And withcritics arguing that SGR has not resolved the corruption issues that made Kenya’s existing rail transport so inefficient, one wonders how Kenyan companies were prioritised with regards to supplying inputs.
So far, and even before the extension to Western Kenya, SGR has cost around $6 billion, equal to a third of Kenya’s foreign debt. It has been argued by Dr. W K Shiloha, author of Sino-Kenyan Co-operation: Whither the West?, that SGR is not economically viable and a better option would have been to upgrade existing archaic railway lines. According to Dr. Shiloha, this was not done because it would have encroached on the road transportation interests of politically connected individuals and their companies. He also points out that SGR will not improve carrying capacity or reduce costs, and will therefore not generate enough revenue to pay off the $4 billion spent for the line from Mombasa to Nairobi.
Both the IMF and World Bank have raised warnings about Kenya’s increasing debt appetite, stating that its repayment burden could affect growth. The Kenyan government has ignored these warnings and continued to borrow. In 2018 debt surpassed 50% of GDP, and over 40% of government revenue is required for debt repayment, which is said to cancel out expected economic benefits from SGR and other infrastructure investments.[9] In 2018 Chinese loans made up 11% of Kenya’s total debt.[10]
ETHIOPIA
For the past decade or so, Ethiopia has been a prominent African investment destination, particularly for China. In line with Ethiopia’s strategic development policies, $13 billion in loans from China have been directed towards transport infrastructure, industrial parks and power plants. This alongside a population of around 150 million, labour costs lower than China or even Vietnam, and an investor friendly policy stance,[11] has seen Ethiopia’s GDP grow at an average rate of over 11.55%[12] for the past 12 years.
Ethiopia may be seen as a positive case where the borrower and lender countries have recalibrated after considering costs and benefits of further loans. Recently China began scaling back is investment in Ethiopia, citing risks around Ethiopian foreign exchange shortages – due to imports vastly outstripping exports for the last 5 years or so – as well as high levels of government debt.
Also speaking at the seminar on Africa-Chinese relations hosted by the University of Johannesburg, Prof. MessayMutulega,[13] while lauding the economic benefits the Chinese loans (amongst investments from other countries), highlighted corruption as a major issue in Ethiopia generally. However, a slew of recent arrests of government officials for corruption is a step in the right direction for the reformist prime minister Abiy Ahmed, elected in April last year.[14]
Despite all the good news, earlier this year the IMF raised its rating of Ethiopia’s risk of debt distress to high, and in a sign that the government is facing difficulties paying back some of its debt as originally agreed, an announcement was made recently with regards to the restructuring of a $4 billion loan for the railway line between Addis Ababa to Djibouti, to be paid over 30 years instead of the initially agreed 10. Going forward the financial viability of the railway may rely on the success or failure of Djibouti’s improved port and free trade zone, both Chinese funded at $590 million[15] and $3.5 billion respectively.[16]
Ethiopia’s debt-to-GDP ratio currently stands at just under 60%, and due to the country having one of the fastest growing economies in the world, some academics believe its debt levels will remain safe for at least the next few years to come.[17] Assuming the $12.1 billion in loans extended in the last 10 years makes up the total Chinese loans, this would imply that Ethiopia’s debt to China is 26.1% of the country’s debt. [18]
Charles Collocott is a researcher at the Helen Suzman Foundation.
Footnotes:
[1]Yu, Donghai, Why the Chinese Sponsored the TAZARA: An Investigation about the People’s Republic of China’s African Policy in the Regional Context, 1955-1970 at 2-12.
[2]Tanzania, Zambia to review laws to allow private investors to run TAZARA: minister - Xinhua | English.news.cn
[3]TAZARA Railway - Wikipedia
[4] Op cit note 1 at 17.
[5]TAZARA Railway - Wikipedia
[6]We are in really bad shape, admits Tazara management
[7]No, China is not taking over Zambia’s national electricity supplier. Not yet, anyway.
[8]Lessons from Kenya’s New, Chinese-funded Railway
[9]Westen K ShilahoSino-Kenyan Co-operation: Whither the West? 2018, at 5-12.
[10]https://www.the-star.co.ke/news/2018/08/06/kenyas-public-debt-is-rising-to-dangerous-levels_c1798513
[11]https://www.moneyweb.co.za/news/africa/china-ethiopia-its-complicated/.
[12] World Bank.
[13] from the School of Development at the University of Addis Ababa.
[14]https://www.ft.com/content/33b29dd4-e98d-11e8-a34c-663b3f553b35
[15]https://www.scmp.com/news/china/dip...hinese-investment-boom-changing-face-djibouti
[16]https://allafrica.com/stories/201807050757.html
[17] John Hurley, Scott Morris, and GailynPortelance. 2018. “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for Global Development, at 13.
[18]https://www.moneyweb.co.za/news/africa/china-ethiopia-its-complicated/
China's loans to South Africa (I)
Charles Collocott |
22 January 2019
Charles Collocott examines our debt situation, and explains why we should look at other country's experiences
China's loans to South Africa – Brief I
22 January 2019
INTRODUCTION
In this brief I will give a short review of the overall debt risk currently facing South Africa, followed by a summary of the Chinese loans taken on so far and the reasons given by government for refusing to disclose the terms. I close the brief by laying the grounds for enquiries into the experiences other countries have had with Chinese debt – in order to see what South Africa can possibly learn from them.
THE GENERAL DEBT RISK PICTURE
When a government’s borrowing is not accompanied by sufficient economic growth and revenue generation to service its debt, this can result in a downward spiral that ends with debt restructuring and bailouts.[1]
According to a study by the World Bank on a sample of 79 countries, the threshold debt-to-GDP level is 77.1%. Beyond this, each additional percentage point in debt-to-GDP costs the economy 0.0174% in annual real growth.[2] A more recent study, by the Centre for Global Development, shows a statistically significant threshold effect in countries with rising debt-to-GDP ratios above 50-60%, where growth drops off and leads to default or debt restructuring.[3] South Africa falls into this category, with its debt-to-GDP ratio almost doubling from 27.8% in 2007 to 53.1% by 2017.[4]
Adding to South Africa’s concerns are the current levels of debt held by the state owned enterprises (SOEs), and critically not just the government guaranteed debt; with cross-default clauses in place within the SOE loan agreements, if for example Eskom were to default on its payment to just one debtor, this would trigger an automatic recall on the loans to all its debtors. On that basis, all Eskom’s debt is effectively government guaranteed, because government cannot allow the parastatal to go into liquidation through a triggering of the cross-default clause. Therefore, a highly conservative assumption would be that the only SOE debt government is liable for, is the debt which it has guaranteed.
The latest reported total guaranteed debt figure is R670 billion, with R350 billion held by Eskom alone.[5] Adding the recent R411 billion in Chinese loans would take the total figure to around R1 081 billion – making up 87% of the government’s revenue, and 23% of GDP.[6] If this total of R1 081 billion was called upon, this would push the debt to GDP ratio to 69.95% - assuming pre-existing debt and GDP remained constant.
The primary concerns around South Africa reaching unsustainable debt levels are that it will impede sound public investment, reduce economic growth,[7] and do significant damage to citizens’ livelihood.[8]So far in 2018, government has taken a series of three loans from China, totalling R411 billion.
If included on government’s books, this would make up 12.5% of the R3.293 trillion total debt.[9] So there can be little doubt that the sheer size of the recent Chinese loans alone has added a significant amount of additional risk to South Africa’s budget.
THE LITTLE WE KNOW ABOUT THE CHINESE LOANS AND GOVERNMENT’S ARGUMENTS FOR NON-DISCLOSURE
With regard to the latest and largest tranche of R370 billion, said to be earmarked for an economic stimulus package, government refuses to divulge any information about it – not the currency, what it will be spent on, interest rates, repayment period, etc. Adding to the abstruseness is that government officials have repeatedly called the R 370 billion ‘a gift.’
However, officials have also made mention of the ‘not exorbitant’ interest rate attached.[10] A gift with interest payments that accrue to the giver is a strange gift indeed. Hence, we feel it safe to assume that it is indeed a loan. Also odd was the Finance Minister, Mr. Tito Mboweni’s responsewhen he was asked by parliament’s Standing Committee on Finance, ‘why the terms were being kept so secret?’ He responded with:
“I understand the concerns that the committee has regarding the loan ... However, China are our friends. It is very difficult to set rules when it comes to friends and money.”[11]
We know that an earlier tranche of R37 billion was loaned to Eskom. It is in US dollars and will thus need to be paid back in US Dollars, which adds exchange rate risk. This loan is to help Eskom finish the Kusile power station, has a grace period of 5 years and repayment begins thereafter in 20 instalments over 10 years.
In response to questions in parliament for further information, such as interest rates and if it has been securitised, President Ramaphosa said the conditions of the loan agreement could not be made public due to confidentiality clauses, and that further disclosure would place Eskom in a disadvantageous position when seeking further funding from the markets.
However, there cannot possibly be any way in which non-disclosure of investment terms will not increase real and perceived risk for possible future investors. This is because withholding material information for any investment by default increases the risk of that investment. There are therefore three other possible reasons for non-disclosure of the terms. First is that the Chinese debt may have been given seniority status in repayments, making current and future creditors to Eskom subordinate and more at risk, and government (wrongly) thinks not disclosing this is the better option.
Second and similar to the first, is that the loans may have been secured using Eskom’s assets, also making future investments more risky and less attractive; and again government is misdirected in its reasoning for nondisclosure. The third possibility is that the terms are so massively skewed in China’s favour, that government simply does not want to disclose them in fear of a public backlash leading up to the general elections.
Finally, the R4 billion tranche was loaned to Transnet and will be used for operation expenses and capital expenditure. It is a five year Rand denominated loan that will be paid back quarterly at a floating and undisclosed interest rate.[12]
THE BASIS GOING FORWARD
With South Africa at risk of reaching or having reached a threshold level of debt-to-GDP, it is important to have a clear picture of the implications of any additional debt burden. Unfortunately, given the secrecy surrounding the recent Chinese loans, this is currently not fully possible. Further adding to the fog is that in contrast with other major creditors, China does not formally participate in multilateral mechanisms, such as the Paris Club, in dealing with sovereign loans and defaults. Chinese debt relief is done in an ad-hoc, case-by-case basis, and as such there is no guiding framework to define China’s approach to debt relief and restructuring. We must therefore rely on anecdotal evidence.[13]
So to try and gauge a range of potential outcomes, my next two briefs will look at the experience six other countries have had with taking on Chinese debt, the fourth brief will look at how those experiences could or should be applied to South Africa, and the final brief will include ancillary matters as well as an overall conclusion.
Charles Collocott is a Researcher at the Helen Suzman Foundation.
Correction made 24 Jan 2019.
[1]John Hurley, Scott Morris, and GailynPortelance. 2018. “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for Global Development, at 2.
[2]"Finding the tipping point -- when sovereign debt turns bad" (English) | The World Bank
[3] Op cit note 1 at 11.
[4]South Africa Government Debt to GDP | 2019 | Data | Chart | Calendar
[5] Medium Term Budget Policy Statement 2018, National Treasury, Republic of South Africa.
[6]Main budget: Revenue, expenditure, budget balance and financing; 2001/02 to 2020/21 from www.treasury.gov.za
[7] Op cit note 1 at 3.
[8] Ibid.
[9]https://www.nationaldebtclocks.org/debtclock/southafrica accessed on 14/01/2019; total debt excluding the Chinese loans of R411 billion came to R2.882 trillion.
[10]China gifts SA with R370bn
[11]MPs grill Treasury over Eskom China loan 'secrets'
[12]Revealed: Cyril Ramaphosa details how SA will repay Chinese loans
[13] Op cit note 1 at 19.
China's loans to South Africa (II)
Charles Collocott |
24 January 2019
Charles Collocott on the experiences of Sri Lanka, Pakistan and Argentina
CHINA’S LOANS TO SOUTH AFRICA - BRIEF II
The first brief gave an overview of South Africa’s debt situation, how the loans from China fit into this, and why we need to look at the experiences other countries have had with Chinese debt. The third brief covers the experiences of Zambia, Kenya and Ethiopia, while the fourth brief summarises the lessons learned from the countries analysed. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.
SRI LANKA
The Hambantota Port in Sri Lanka is the most vivid example of China’s use of debt in gaining global influence, and how forceful it can be in reclaiming what is owed.
Following the 26 year civil war, China became an indispensable partner to Sri Lanka’s government. Due to accusations of human rights violations in the final years of the war, Sri Lanka became heavily reliant on China for economic, military and political support, while India remained a key trading partner throughout.
When the war ended in 2009, President Rajapaksa and his family were in control of numerous government ministries, and around 80% of government spending. So when the president decided to build a large port in his home district of Hambantota, little could stop him. Feasibility studies on the port indicated it would not work, and lenders such as India refused to advance any loans. The Chinese government’s Export-Import Bank (Exim) then agreed to the first loan of $307 million.
Typical of most Chinese infrastructure loans, a condition was that a Chinese state owned company, China Harbour, was to build the port. Other strings attached had to do with the geostrategic position of the port, and not only in relation to its position to Chinese competitor, India; in 2014, on the same day Prime Minister Shinzo Abe of Japan was visiting Sri Lanka, Chinese submarines docked in the harbour.
From the start, officials questioned the wisdom of a second major port when the main port in the capital was thriving and had room to expand. As predicted, the port failed to attract enough business and was an economic failure. The initially moderate lending terms become more onerous as timelines and additional financing had to be renegotiated. Interest rates moved from a variable 1-2% to a fixed 6.7%. In comparison, interest charged on Japanese infrastructure loans are below 0.5%.
In order to get debt to manageable proportions, the Sri-Lankan government looked to remove around $1 billion in debt off their balance sheets. To do this, the only terms that could be agreed upon was to hand over 85% of the port’s equity to China, as well as 15 000 acres of surrounding land on a 99 year lease. This however was possibly not the only assault on Sri Lanka’s sovereignty resulting from Chinese debt.
In the run up to the 2015 Sri Lankan elections, it was reported that the Chinese, eager to keep Rajapaska in power, transferred over $7.6 million from China Harbour’s bank account in support the incumbent’s campaign.
The effort failed and a new government came into power, with a mandate to scrutinize Sri Lanka’s financial deals with China. The new government tried to reorient toward India, Japan and others, but soon realised that they could not fill the economic space of China. There was no choice but to keep taking Chinese loans ‘until economic discipline is introduced,’ said the new finance minister.[1] At the end of 2018 Sri Lanka’s debt-to-GDP was 77%[2] and around 8.7% of total debt was Chinese.[3]
PAKISTAN
As China’s flagship project in its Belt and Road Initiative, the China Pakistan Economic Corridor (CPEC) runs 3 000 kilometre from West China, through Pakistan and ends at the Arabian Sea. The infrastructure required for the CPEC was initially estimated at $46 billion, but its value in mid 2017 came to around $62 billion.
A hallmark of CEPC has been secrecy and a lack of transparency, squashing any attempt at a real cost-benefit analysis and fuelling speculation that the terms may be skewed heavily in favour of China. In fact, all materials (except for cement from Pakistan), equipment and labour are sourced from China.
Furthermore, following the kidnapping and murder of two Chinese nationals by Islamic State in the Pakistan’s Balochistan province,[4] and the fact that since 2003 more than 2 600 people have been killed or wounded in suicide attacks in the area,[5] the Pakistan army have had to raised a new division called the Special Security Division (SSD) in order to protect Chinese nationals working on CPEC.
With the funding coming from from Pakistan’s fiscus, the SSD comprises 9 000 Pakistan Army soldiers and 6 000 para-military forces.[6]
While CEPC will modernise Pakistan’s infrastructure, concern has been raised about Pakistan’s ability to leverage the assets in order to repay the resulting debt.[7] For example, Pakistan has a port similar to Hambantota in Sri Lanka, the Gwadar Port. Gwadar too has a strategic position near the Strait of Hormuz, through which around 40% of the worlds oil passes. The port however does not seem necessary as it has failed to bring in business, and will therefore likely be unable to raise revenue to pay back its debt.[8]
In 2018 Pakistan voted in a new government, also with a mandate to scrutinise the financial deals with China. The former Prime Minister Nawaz Sharif, who championed Chinese funded projects, was jailed for corruption in 2018. But the new government, like the new Sri Lankan government in 2015, has found itself with no choice to but to persist with taking on Chinese debt. The country’s debt-to-GDP ratio is an estimated at 70.1%,[9] and around 20% of total debt is Chinese.[10]
The International Monetary Fund issued a recent report stating that CEPC has been a mixed blessing to Pakistan, in that it has brought in needed investment, but at the same time greatly increased the country’s current account deficit and external debt.[11]
ARGENTINA
In 2001 after being unable to pay its debts, resulting in the world’s largest sovereign default at $100 billion, the Argentinean government was shut out of international credit markets.[12] In 2007 the leftist President Cristina Fernández de Kirchner came into power and set about forging close ties with China, which was not the case for Argentina before.[13]
In 2009 Argentina found itself in another crisis, with high inflation, billions of dollars due in debt payments and public anger over the nationalisation of $30 billion in private pension funds. It was at this point that the government sought China’s help. First was a $10.2 billion currency swap in order to stabilise the peso, and then a promise of $10 billion to fix its dilapidated railways. At the same time secret talks began between the governments around China’s armed forces building a satellite-tracking hub in Argentina’s Neuquén Province. In 2012 and in secret, the Argentinean government agreed to China’s right to the land rent free for 50 years.[14]
In 2015 the centre-right presidential candidate Mauricio Macri won Argentina’s elections, with a promise to restore relations with the United States and Europe. Macri delivered by settling some of the country’s debt problems via a repayment deal to hedge funds. This in turn allowed Argentina re-entry into international credit markets and a record emerging market bond sale of $15.6 billion.[15]
However, prior to this during the final months of Kirchner’s presidency, Kirchner agreed to take on over $20 billion in Chinese loans to finance infrastructure projects. Macri sought to review and possibly cancel these debt agreements, citing their lack of transparency and possible negative impact on the environment.
In 2016 Macri met Chinese President Xi Jinping to discuss the deals, with the outcome of that meeting being that China were ‘willing to revisit [the] agreements’ in order to ‘deepen the relationship instead of reducing it.’ China however had tied Argentina’s hands in the negotiations with a cross-default clause connected to the hydropower dam contracts Macri wanted to cancel. If cancelled, the loans for an important railway project would be halted too. Macri was therefore unable to cancel any of the mega-deals but did manage to renegotiate the terms in order to avoid cost overruns and soften the environmental impact. In this regard China agreed to lower the capacity of the dams.
Argentina also managed to renegotiate the space station agreement, with China agreeing to use the base for civilian purposes only. This was after claims that the former government had given away too much by failing to specify that the base could only be used for peaceful purposes.[16]
While the deals with China have managed to avoid allegations of corruption, former president Kirchner is facing corruption charges for accepting bribes from local construction companies in exchange for public works contracts.[17]
Argentina continues to rely on China as a lender and a major customer for its commodities. Trade between the two countries has quadrupled since 2001, and in the last decade China has financed $18.2 billion in mainly infrastructure projects, with interest rates reported between 3 and 4 percent. The financial ties further extended to currency swaps, which now come to $18.7 billion.[18]
The country’s debt-to-GDP was last report at 50.6% at the end of 2017[19] and estimated by the IMF to have jumped to 65% for 2018.[20] Assuming the above Chinese debt figures represent Argentina’s total debt to China, this comes to 11.3% of total debt in 2018.[21]
Charles Collocott is a Researcher at the Helen Suzman Foundation.
Footnotes:
[1]How China Got Sri Lanka to Cough Up a Port
[2]New Chinese loan may further plunge Sri Lanka into debt trap
[3]Sri Lanka sinks deeper into China's grasp as debt woes spiral, New Chinese loan may further plunge Sri Lanka into debt trap and Sri Lanka - national debt 2022 | Statistic; China holds 10% of total foreign debt of $55 billion, with total debt in 2018 at $63.07 billion.
[4]ISIS Says It Killed Two Chinese Hostages in Pakistan
[5]China's flagship port in Pakistan shackled by heavy security
[6]Pakistan raises Special Security Division successfully - CPEC Latest News
[7]Can Pakistan Afford CPEC?
[8]What’s Happening at Pakistan’s Gwadar Port?
[9]Pakistan’s debt-to-GDP ratio to hit 15-year high | The Express Tribune
[10]Is Pakistan falling into China’s debt trap?
[11]Imran Khan expected to stick with Chinese investments in Pakistan
[12]From a Space Station in Argentina, China Expands Its Reach in Latin America
[13]At the G-20, It's China, Not the US, That Argentina Loves Most
[14] Op cit note 6.
[15]China Made Mauricio Macri a Deal He Couldn’t Refuse
[16] Op cit note 9.
[17]Argentina ex-President Kirchner hit with more corruption charges
[18]UPDATE 1-Argentina expands China currency swap as Beijing eyes Latin America | Reuters
[19]Argentina Public Debt: % Nominal GDP [Data & Charts]
[20]IMF says Argentina debt to peak at 65 pct of GDP in 2018 | Reuters
[21][Up-to-Date] Argentina National Government Debt [Data & Charts]
China's loans to South Africa (III)
Charles Collocott |
24 January 2019
Charles Collocott examines the experiences of Zambia, Ethiopia and Kenya
CHINA’S LOANS TO SOUTH AFRICA - BRIEF III
The first brief was an overview of South Africa’s debt situation, how the loans from China fit into this, and why it is we need to look at the experiences other countries have had with Chinese debt; the second brief considered the experiences Sri Lanka, Pakistan and Argentina have had with Chinese debt; the fourth brief summarises the lessons learned from these experiences. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.
ZAMBIA
China’s loans to Zambia began the 1960s, when the white minority Rhodesian government cut off Zambia’s railway access for its copper to be transported to ports in South Africa. After failed attempts to secure funding from the West because of failed feasibility studies, the Zambian and Tanzanian governments commissioned China to assist fund and build TAZARA; a railway line from the Copper Belt in Zambia to Dar es Salaam in Tanzania.
At an initial cost of $570 million, TAZARA was at the time the single biggest overseas loan ever by the Chinese government.[1] The loan was interest free and not indexed to inflation.[2] Due to the limited amount of foreign currency the Chinese had available, it was agreed that 75% of the $560m was to come from the sale of Chinese goods in Tanzania and Zambia; that is, Tanzania and Zambia would import Chinese goods, and the proceeds from the sale of these goods would be put towards construction expenses. Additionally, mainly Chinese inputs and equipment would be used. Goods into the region from China rose from 0.9% of total imports in 1966, to 22.4% in 1970. The impact on the domestic manufacturers and economies of Zambia and Tanzania was disastrous and the terms of import had to be renegotiated.
During the 1980s and despite the earlier failed feasibility studies, the European Economic Community, several European states and the United States did an about turn and decided to get involved. The Western countries stated that this was to try and lessen the dependence of other Southern African countries on apartheid South Africa. Over the decade a cumulative $200 million in loans was extended to the parastatal.[3]
TAZARA unfortunately has been a financial failure due to substandard equipment, poor management, fluctuations in the copper price[4] and changes to the political-economy. With independence in Namibia and the end of apartheid in South Africa in the 90s, as well the end of the civil wars in Angola and Mozambique, Zambian producers had more transport options available and traffic on the railway line decreased to only 690 000 tons in 2009 from several millions in the 1970s.
In an attempt to revitalise TAZARA China cancelled its debt in 2011; and because it was interest free and not linked to inflation, the real value of the debt had in fact shrunk by over 80%. Then between 2010 and 2012 China extended an additional $81 million in interest free loans for equipment and training.[5] Despite this, and with no current debt figures publicly available, in 2018 TAZARA’s management highlighted the difficulties when reporting gross revenue at $21.32 million and running costs at $34 million.[6]
In recent times further loans and expertise have been extended by the Chinese to the Zambian government for the construction of a power plant, roads, stadiums and industrial parks. According to news reports the current extent of Zambia’s debt to China is not known with certainty, and there have also been reports that Zesco, Zambia’s state owned power company, has been used as security for the loans. Speaking at a recent seminar on Africa-Chinese relations hosted by the University of Johannesburg’s Confucius Institute, Mr. ChaimbaPhiri – MD of Heron Consulting which specialises in investment in Zambia – recalled having asked the Zambian Finance Minister, Mrs. Margaret Mwanakatwe, about reports of Zesco being used as security. Mrs. Mwanakatawe apparently told Mr. Phiri that Zesco was not used for this purpose, and the loans were instead insured through Sinosure – a Chinese state owned export and credit insurance company. A routine search of news reports on the subject however reveals strong speculation within the media that Zesco has been put forward as security.
Economists have expressed concern around the lack of political will shown by the Zambian government in managing its debt, which was expected to rise to 60% of GDP by the end of 2018, compared to 25.6% in 2014 – raising questions of government responsibility in borrowing and insufficient due diligence by lenders. As of June this year, Zambia’s external debt was close to a third of the total, which would see an increase the risk of default if the Zambian Kwacha was to weaken. In the press, Zambian officials dismiss the possibility of default, simply by saying that Zambia has never defaulted. This however is misleading if one considers that less than a decade ago, Zambia had its debt to the World Bank and IMF written off.[7]
KENYA
Centered on transport infrastructure, China has also provided extensive funding and expertise to Kenya in recent times. The largest of these projects has been the Standard Gauge Railway line (SGR) from the port city of Mombasa to Western Kenya. Initially SGR was to also reach Uganda and Rwanda, but Rwanda withdrew citing high costs, and Uganda withdrew due to security concerns, opting instead for a Tanzanian route; in 2008 protestors in Nairobi uprooted a section of the existing railway line and blocked roads, thereby making it impossible for Uganda to receive imports from Kenya, which crippled the economy.
When it comes to inputs for SGR, reports have it that the Kenyan government has negotiated better deals on behalf of Kenyans when compared to other countries. All cement for the SGR was supplied by Kenyan businesses; railway cars were made in Kenya; over 25 000 Kenyans were employed and trained; 33 crossing stations, as well as bridges and tunnels were added to reduce the impact on wildlife; and the National Land Commission doubled its budget for compensation. However, many of these measures still proved controversial, particularly land value estimates, working conditions for Kenyan employees, and the stretches of track in areas with high biodiversity.[8] And withcritics arguing that SGR has not resolved the corruption issues that made Kenya’s existing rail transport so inefficient, one wonders how Kenyan companies were prioritised with regards to supplying inputs.
So far, and even before the extension to Western Kenya, SGR has cost around $6 billion, equal to a third of Kenya’s foreign debt. It has been argued by Dr. W K Shiloha, author of Sino-Kenyan Co-operation: Whither the West?, that SGR is not economically viable and a better option would have been to upgrade existing archaic railway lines. According to Dr. Shiloha, this was not done because it would have encroached on the road transportation interests of politically connected individuals and their companies. He also points out that SGR will not improve carrying capacity or reduce costs, and will therefore not generate enough revenue to pay off the $4 billion spent for the line from Mombasa to Nairobi.
Both the IMF and World Bank have raised warnings about Kenya’s increasing debt appetite, stating that its repayment burden could affect growth. The Kenyan government has ignored these warnings and continued to borrow. In 2018 debt surpassed 50% of GDP, and over 40% of government revenue is required for debt repayment, which is said to cancel out expected economic benefits from SGR and other infrastructure investments.[9] In 2018 Chinese loans made up 11% of Kenya’s total debt.[10]
ETHIOPIA
For the past decade or so, Ethiopia has been a prominent African investment destination, particularly for China. In line with Ethiopia’s strategic development policies, $13 billion in loans from China have been directed towards transport infrastructure, industrial parks and power plants. This alongside a population of around 150 million, labour costs lower than China or even Vietnam, and an investor friendly policy stance,[11] has seen Ethiopia’s GDP grow at an average rate of over 11.55%[12] for the past 12 years.
Ethiopia may be seen as a positive case where the borrower and lender countries have recalibrated after considering costs and benefits of further loans. Recently China began scaling back is investment in Ethiopia, citing risks around Ethiopian foreign exchange shortages – due to imports vastly outstripping exports for the last 5 years or so – as well as high levels of government debt.
Also speaking at the seminar on Africa-Chinese relations hosted by the University of Johannesburg, Prof. MessayMutulega,[13] while lauding the economic benefits the Chinese loans (amongst investments from other countries), highlighted corruption as a major issue in Ethiopia generally. However, a slew of recent arrests of government officials for corruption is a step in the right direction for the reformist prime minister Abiy Ahmed, elected in April last year.[14]
Despite all the good news, earlier this year the IMF raised its rating of Ethiopia’s risk of debt distress to high, and in a sign that the government is facing difficulties paying back some of its debt as originally agreed, an announcement was made recently with regards to the restructuring of a $4 billion loan for the railway line between Addis Ababa to Djibouti, to be paid over 30 years instead of the initially agreed 10. Going forward the financial viability of the railway may rely on the success or failure of Djibouti’s improved port and free trade zone, both Chinese funded at $590 million[15] and $3.5 billion respectively.[16]
Ethiopia’s debt-to-GDP ratio currently stands at just under 60%, and due to the country having one of the fastest growing economies in the world, some academics believe its debt levels will remain safe for at least the next few years to come.[17] Assuming the $12.1 billion in loans extended in the last 10 years makes up the total Chinese loans, this would imply that Ethiopia’s debt to China is 26.1% of the country’s debt. [18]
Charles Collocott is a researcher at the Helen Suzman Foundation.
Footnotes:
[1]Yu, Donghai, Why the Chinese Sponsored the TAZARA: An Investigation about the People’s Republic of China’s African Policy in the Regional Context, 1955-1970 at 2-12.
[2]Tanzania, Zambia to review laws to allow private investors to run TAZARA: minister - Xinhua | English.news.cn
[3]TAZARA Railway - Wikipedia
[4] Op cit note 1 at 17.
[5]TAZARA Railway - Wikipedia
[6]We are in really bad shape, admits Tazara management
[7]No, China is not taking over Zambia’s national electricity supplier. Not yet, anyway.
[8]Lessons from Kenya’s New, Chinese-funded Railway
[9]Westen K ShilahoSino-Kenyan Co-operation: Whither the West? 2018, at 5-12.
[10]https://www.the-star.co.ke/news/2018/08/06/kenyas-public-debt-is-rising-to-dangerous-levels_c1798513
[11]https://www.moneyweb.co.za/news/africa/china-ethiopia-its-complicated/.
[12] World Bank.
[13] from the School of Development at the University of Addis Ababa.
[14]https://www.ft.com/content/33b29dd4-e98d-11e8-a34c-663b3f553b35
[15]https://www.scmp.com/news/china/dip...hinese-investment-boom-changing-face-djibouti
[16]https://allafrica.com/stories/201807050757.html
[17] John Hurley, Scott Morris, and GailynPortelance. 2018. “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective.” CGD Policy Paper. Washington, DC: Center for Global Development, at 13.
[18]https://www.moneyweb.co.za/news/africa/china-ethiopia-its-complicated/