12 December 2015 China to aid indebted African sovereign

China to aid indebted African sovereigns

IFR 2113 12 December to 18 December 2015

By Christopher Spink

China has pledged a further US$60bn in funding to African countries at the latest Forum on China-Africa Cooperation, and also shown its willingness to consider offering debt relief to China’s African debtors.

That amount was triple the US$20bn sum pledged at the previous forum three years ago and comes as the continent’s commodity exporters face financial strains with raw material prices falling – partly due to reduced demand from China.

At the same time, many such countries have increased their debt levels, borrowing from China as well as other international investors via issuing Eurobonds, with the majority denominated in US dollars. The strengthening of that currency has effectively increased this debt burden.

Financing difficulties are becoming more evident. Ghana, for instance, in October only managed to get away its US$1bn 2030 amortising bond by enlisting the World Bank to guarantee 40% of the amount. It still had to pay an eye-watering 10.75% coupon to attract investors.

Some have mooted that this was effectively a modification of its recent US$918m IMF agreement in disguise. Ten years ago the G8 group of developed countries agreed to forgive the debts of 36 “heavily indebted poor countries” – the majority of which were African – via an IMF and World Bank scheme.

“It would not look savvy for HIPC countries to now turn directly back to the IMF for further help so soon after receiving debt relief,” said one sovereign debt restructuring expert. “The staggering coupon on the Ghana bond suggests this was a special situation in effect to get further official money in.”

As part of the HIPC scheme, other creditors were encouraged to follow suit and also offer debt relief. Paris Club countries have done so, but China is not a member. In 2009 it did cancel some African debt. Since then it has instead increased its loans to Africa.

An IMF staff paper published last week said that the level of non-Paris Club lending to HIPCs has gone from 8% of GDP in 2007 to over 11% in 2014. “Any future debt relief operations will require more coordination across a diverse group of bilateral creditors,” said the paper.

It also highlighted that with Paris Club creditors less significant, it might be harder to coordinate such creditors too, leading to some who might hold out from any relief packages.

“As the role of the Paris Club in bilateral official flows has significantly declined, a gap has emerged in the global architecture for resolving official debt crises,” it said.

In a separate paper issued last week, the IMF officially changed its policy to allow it to continue lending under certain circumstances to countries that had fallen behind with payments to bilateral creditors.

So far this year China has signed 22 loan agreements with African countries, pledging US$15.63bn, according to China Investment Research. That is 23% of all bilateral loans agreed by China so far this year.

However, there had been concerns that China was now less interested in helping Africa, since raw material imports are down by at least a third this year – reflecting the weaker Chinese economy. Yun Sun, a non-resident fellow of the Brookings Institute, noted that Xi made little reference to natural resources.

“In the near term, in light of China’s own economic slowdown, questions do exist about the implications of China’s economic ties with Africa and the sustainability of China’s financial pledges,” she said.