The US military this week wraps up its flagship annual military cooperation drill in Africa whose 2022 iteration was marked by its expansion ... beyond North Africa and the inclusion of Israel as an observer.
In a report published on 10 November, the German insurer Allianz and its credit insurance subsidiary Euler Hermes revealed a disturbing finding: over the coming decade, China may no longer be able to provide Africa with the same amount of funding, taking the form of loans, investment and trade, as in the past.
China has a heavy debt burden. The country’s share of overall debt owed to G20 countries increased from 45% in 2013 to 63% at the end of 2019. China made significant investments in foreign countries to secure supply and promote its exports. What’s more, the country buys half of the world’s raw materials.
The authors of the report indicate that they “expect China to slow its international engagement over the next few years”. They argue that besides the trade war with the United States, two reasons are behind this shift.
First, the Chinese Communist Party’s decision, driven by President Xi Jinping, to change the country’s growth model to what it calls a “dual circulation” strategy. The idea is to prioritise its domestic market in order to reduce the country’s reliance on imports while maintaining its export market shares. This refocusing is expected to help reduce cash outflows.
Second, the Chinese economic machine is set to continue to experience a systemic slowdown and see its pace of growth diminish from the 7% observed each year in the 2010s to somewhere in the range of 3.8% and 4.9% each year over the coming decade. This shift will further strain China’s overseas lending and investment activities.
Cumulative loss of $30.5bn
The report examines what this disengagement could mean for low and middle income countries. Using a sample of 10 economies that includes seven African nations (Angola, Egypt, Ethiopia, Ghana, Kenya, South Africa and Zambia), the authors try to determine the resulting external financing gap.
Impact No. 1: debt.
China has incurred significant losses on the loans it granted to multiple countries. It has become clear that several countries – mainly in Africa, including Angola, Ethiopia, the Republic of Congo and Zambia – are no longer in a position to repay the debt they owe China.
To stem its losses on the continent, China has drawn closer to the Paris Club, whose framework adopted on 13 November brought the country into a coordinated debt restructuring process. Going forward, China will be much more selective about the loans it grants.
The report estimates that between 2021 and 2025, this cautious approach would deprive South Africa of $10.7bn, Kenya of $6.6bn, Angola of $5.2bn, Ethiopia of $4.7bn, Egypt of $1.3bn, Zambia of $1.1bn and Ghana of $0.9bn. Over a five-year period, these seven countries would lose a total of $30.5bn.
This shortfall would be especially problematic for Ethiopia since close to 15% of its external financing needs would be left uncovered.
Impact No. 2: Loan refinancing
China’s relative inward-looking shift and stricter monitoring of foreign investments made by public and private companies. Given their reliance on Chinese investment, Ethiopia, Ghana and Zambia would have the most to lose if the country scales back the funding it provides.
Impact No. 3: raw materials.
The slowdown in China’s growth would decrease its iron ore and oil and gas consumption, depriving exporting countries of foreign exchange earnings. Over a 10-year period, the revenue shortfall would amount to $9bn, with Angola alone losing $4.7bn.
African countries have established such a high level of cooperation and trade and financial flows that the backbone of their relations should remain stable.
The report concludes that China’s withdrawal would come at a bad time, as many loans are set to be refinanced in 2022 and 2023. It is doubtful that the markets would be willing to lend money cheaply to countries whose funding has been undermined in this way.
Strong Chinese-African relations
However, the report’s conclusions should be put into perspective. Though he doesn’t deny that China is on the verge of changing its growth model, Arthur Minsat, head of unit for Africa at the OECD Development Centre, says: “African countries have established such a high level of cooperation and trade and financial flows that the backbone of their relations should remain stable”.
China has staked a lot on Africa. In 2018, its trade with the continent rose by 19.7%, while increasing by just 12% with the rest of the world. During that same year, China’s investments on the continent climbed to $5.4bn, whereas Latin America received a mere $1.9bn in funding.
Minsat adds: “On top of the very strong Chinese-African partnership, the billions of dollars’ worth of projects associated with the Belt and Road Initiative and the harnessing of primary commodities makes it crystal clear that China is here to stay in Africa.”
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