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Cameroon hopes to break Chinese debt logjam with eurobond sale

By David Whitehouse
Posted on Monday, 24 May 2021 11:16

President of Cameroon Paul Biya at The Great Hall Of The People in Beijing, China 22 March 2018. Lintao Zhang/Pool via Reuters

Cameroon is likely to seek a sale of eurobonds in the coming weeks as part of a strategy to avoid a Zambia-style standoff between Western and Chinese creditors.

The country’s treasury said in April that it is in talks with Rothschild & Co. to advise on a eurobond sale in the first half of this year. The bond sale is likely to be combined with a full or partial tender offer for the existing $750m 2025 bond to extend the maturity of its debts, according to research from Mark Bohlund, a senior credit research analyst at REDD Intelligence in London.

Cameroon was the Central African country which as hardest hit by the Covid-19 pandemic in 2020, according to the African Development Bank (AfDB). Real GDP contracted by 2.4%, compared with growth of 3.7% in 2019, largely due to the oil price slump which Cameroon could ill afford. Over the long term, the country’s public debt rose from 12% of GDP in 2007 to 45.8% in September 2020. Cameroon has “has the characteristics of a country at high risk of debt distress,” according to the AfDB.

The China Africa Research Initiative (CAFRI) says that among African countries at high distress risk, only Djibouti and Angola have a higher proportion of Chinese external debt than Cameroon. The country’s external debt servicing obligations increased almost fourfold between 2015 and 2019, according to REDD Intelligence.

The danger is that investors will be reluctant to provide more finance without transparency on Chinese loans. Chinese creditors to Zambia, which defaulted on eurobond debt in November, have been unhappy with payments being deferred under the G20 Debt Service Suspension Initiative (DSSI) without reciprocation from Western com­mercial lenders, Bohlund writes.

Western creditors, in turn, have been frustrated by their inability to tell whether Chinese lenders are being treated equally by Zambia.

  • Agreement has been reached on the deferment and forgiveness of some minor Chinese loans to Cameroon, but a “more comprehensive reprofiling is likely to require similar extension of its eurobond debt,” Bohlund writes.
  • Replacing some of the 2025 eurobond with longer-dated debt could open the door to doing that, he adds.

Repayments to rise

Improved oil prices provide some breathing space. The Economist Intelligence Unit (EIU) now forecasts that global oil prices will average of $68.5 per barrel in 2021-22, having previously given a prediction of $54.5.

This will help real GDP to grow by 3% in 2021, and the fiscal deficit will narrow from an estimated 7.3% of GDP in 2020 to 5.3% in 2021 and 4.2% in 2025, the EIU says.

That may not be enough of a tailwind as scheduled debt payments increase.

  • Bohlund calculates that annual principal repayments to official Chinese creditors are set to jump by 170% from an average of $105m in 2016-2020, to $284m in 2021-2025.
  • This is partly due to the fact that the grace periods on loans Cameroon contracted with China, in 2017-18 for projects such as the Kribi port and the Memve’ele hydropower plant projects, will run out.
  • According to Deborah Brautigam of CAFRI, Chinese banks could slow or pause disbursement of loans if Cameroon is unable to finance its share of projects, or can’t complete tasks like compensating landholders in the project areas.
  • These debts will need longer repayment schedules to reduce Cameroon’s risk of external debt distress, Bohlund writes.
  • China’s traditional approach to distressed debt claims in a piecemeal, ad hoc fashion, but “a more comprehensive reprofiling of its loans to Cameroon is clearly needed.”

Bottom line

Creditors are still being asked to decide their next move without being able to see each the cards that other lenders are holding.

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