China says it has struck agreements with half of the 20 low-income nations that have requested debt restructurings as part of their efforts to tackle the coronavirus pandemic.
“Work on this is progressing well,” a Chinese foreign ministry spokesperson said, adding that the World Bank and major developed nations still held most of the debt of a number of heavily indebted countries.
Beijing is negotiating under a G20-led debt standstill scheme for low-income countries launched in April, in a move designed to help them focus on tackling the health and economic crises triggered by the pandemic. The scheme, known as the Debt Service Suspension Initiative, allows eligible countries to freeze bilateral loan repayments until the end of the year.
China’s talks mark the country’s first participation in a co-ordinated, multilateral debt relief initiative. Analysts and private-sector investors say that a deal with Angola, in particular — the largest recipient of Chinese lending across Africa over the past two decades — will be vital.
“You really can’t overstate the importance of Angola in the [DSSI], which also ties into the general international response to the impact of Covid-19 in the developing world,” said Mark Bohlund, senior analyst at Redd Intelligence. Under the DSSI, “a lot of the burden essentially falls on China,” he said.
Angola has received around a third of all Chinese lending to Africa, and has by far the most to gain from the DSSI. About $2.6bn in repayments due in 2020 could be frozen, representing 3.1 per cent of gross domestic product, according to the World Bank. Mozambique could defer a similarly large sum as a share of GDP — around 2 per cent, or $295m.
Angola’s outstanding external government debt totals about $49bn, of which 45 per cent is owed to China, according to the central bank in Luanda. How close the two sides are to a deal is unclear, but investors and analysts believe it could form a template.
“Given that China is such an important creditor for many low income countries, that’s a really big deal,” said Jan Friederich, head of Middle East and Africa sovereign ratings at Fitch, the credit rating agency.
Analysts note that tracking the progress of DSSI negotiations is not easy, particularly given the weight of lending provided by China often without publicly available terms. Much lending has been from state-owned Exim Bank, China’s export credit agency, but some came from state-owned China Development Bank, which China has sought to categorise as commercial lending.
“The issues all investors wrestle with are: we don’t know the official size, we don’t know what is ‘officially official’ and what is not, and we don’t know what the terms are going in or what the terms are going out,” said Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, which has a small exposure to Angolan government bonds.
Although China tended to do “bespoke debt restructuring on a case-by-case basis”, Angola’s terms would inform those offered to other DSSI-eligible countries, and could set a longer-term precedent on the country’s willingness to relieve major borrowers of their debts, said Greg Smith, emerging markets strategist at M&G Investments.
The negotiations will also influence the IMF’s decision about whether to release the next tranche of its $3.7bn loan to Angola — a decision it delayed in July, said Jermaine Leonard, Fitch’s lead Angola analyst.
The “big question” is “will the IMF sign off on [Angola’s] current debt outlook, will they deem it sustainable?” said Mr Leonard. The IMF is precluded from lending to countries with debts it considers unlikely to be repaid. A spokesperson for the IMF said this month the organisation was in “continuing talks” with Angola.
The Angolan Finance Ministry did not respond to a request for comment.
For now, Angola’s benchmark 10- and 30-year dollar-denominated bonds are holding steady. They plunged to record lows in April, in keeping with broad stress across financial markets in response to coronavirus, and they have not yet fully recovered. But prices have settled into a much narrower range since the country announced in June that it would join the DSSI.
Esther Law, emerging markets fixed income portfolio manager at Amundi Asset Management, said China would likely be willing to defer repayments for a large portion of its debt to DSSI-eligible countries.
“The most important question is, how desperate is China to redeem these loans — can they operate without them? I think the answer to that is they can manage without quite easily,” she said. Compared with China’s roughly $3tn in currency reserves, its outstanding loans to eligible countries are small, she added.
Mr Baurmeister said Beijing would be flexible in order to maintain its relationships with resource-rich countries, such as Angola and Zambia. “They have to find a way to rationally pursue their interests,” he said.
But Mr Bohlund said China would want a “quid pro quo” for renegotiating large volumes of loans, such as a commitment from the IMF to issue more emergency support to low-income countries. “[China] can definitely write [the loans] off,” he said. “The issue is they don’t want to create too much of a precedent.” Additional reporting by Jonathan Wheatley and Christian Shepherd