13.06.2018 | Angola’s debt reliance on China may leave it short-changed

Beijing's loans-for-oil ties with country sap Luanda's foreign exchange reserves.

Click here to read the Alaco article in the FT's Beyondbrics.

Yigal Chazan, Alaco

As Angola seeks to attract foreign investors to help diversify its oil-dependent economy, the country’s biggest trading partner, China, looks set to take a leading role, but the considerable leverage it is able to wield may leave Africa’s third-largest economy short-changed.

With Angola heavily indebted to China, Beijing may drive some hard bargains, as has happened in south Asian countries deeply in hock to the Chinese. Important regional partners in China’s Belt and Road Initiative (BRI) have struck deals handing Beijing control of key projects, the ports of Gwadar and Hambantota in Pakistan and Sri Lanka respectively, prompting local concerns over the loss of economic sovereignty.

Yet China faces risk too. With Angolan debts stacking up, new loans for economic diversification projects could push Luanda closer to default. Since oil is used as collateral for Chinese credit, Angola’s current production downturn, coupled with the pressure of increased repayment requirements, might slow or interrupt shipments to China, the main market for Angolan crude and Beijing’s second biggest supplier after Russia. That has been the case with another of China’s suppliers, debt-ridden Venezuela, which has recently struggled to meet its oil-backed loan obligations.

As President Joao Lourenço presses ahead with reforms aimed at creating a more business-friendly environment and rolls back the economic influence of his predecessor José Eduardo dos Santos’s family and cronies, it is not clear yet whether western investors have seen enough to persuade them to engage with a country long plagued by corruption and mismanagement.

China, meanwhile, has moved quickly to signal that it wants to upgrade its relationship with Angola. Long based on loans for infrastructure construction mostly undertaken by Chinese companies, ties are set to expand. In January, on a visit to Luanda, Chinese foreign minister Wang Yi said his country supported Lourenco’s economic diversification strategy.

“Chinese companies have the capabilities and conditions to supply equipment and technologies to re-launch industry in Angola,” Mr Wang said.

The Angolan president, in turn, called on China to invest in mining, agriculture, animal husbandry and tourism. He said Angola would quicken the pace of improvements to the country’s investment and business environment, so as to guarantee what he described as the legitimate rights and interests of Chinese enterprises. Based on current practices, Chinese investment loans would probably be repaid in oil.

Following the end of Angola’s civil war in 2002, China has played a critical role in the reconstruction of the country, building roads, railways, schools and hospitals. In 2015, Reuters reported that there were 50 Chinese state companies and 400 private businesses operating in Angola. But many Angolans are said to distrust their country’s ties with China, in part because oil repayments for loans leave Luanda with relatively little crude to sell on world markets — one reason for the country’s liquidity crisis. As of February, Angola’s foreign-exchange reserves reportedly stood at $12.8bn, just over a third of the 2013 figure.

Now as Mr Lourenço turns his attention to economic diversification, China might leverage mounting Angolan debt to secure bigger stakes in new projects, as it appears to have done in south Asia, and swell Luanda’s loan repayment obligations. China has loaned Angola more than $60bn since the two countries established diplomatic relations in 1983. At the end of 2017, Angola’s debt to China amounted to $21.5bn — about half its external debt — and this year the burden is likely to grow with Luanda negotiating a further $4.4bn in Chinese loans.

Chinese loan repayments are believed to be linked to the price of oil at the time they are negotiated, so Angola has to ship more crude when its value depreciates. Repayment is getting harder and harder as Angolan production has slumped in recent years because of diminishing investment in the country’s ageing offshore fields, the fall in the price of oil making extraction less profitable.

Some energy firms have even been considering exit strategies, their concerns heightened by reported delays in the state oil company Sonangol’s project approvals and payments. The International Energy Agency has said that production is forecast to fall to 1.3m barrels a day in 2023 from a peak of 1.9m barrels a day in 2008, unless new investment is made in oil exploration, with existing fields nearing depletion.

Mr Lourenço has sought to restore confidence in the energy sector, which is dominated by western oil majors, by restructuring Sonangol and sacking its chairman Isabel dos Santos, the eldest daughter of the former president, and more recently cutting tax rates on the development of marginal oilfields to boost investment. It is too early to say whether these moves will significantly raise production, but energy companies are likely to have been encouraged by Mr Lourenco’s unexpected reforms and willingness to move against the family of his predecessor.

Although western investors will have broadly welcomed Mr Lourenco’s attempts to dismantle Mr dos Santos’s economic legacy, they are likely to remain cautious. For although he has made a good start in tackling corruption and introducing reforms incentivising investment, there are still obstacles such as the absence of correspondent banking relationships for dollar transactions and severe foreign currency shortages, as well as questions over how sustained his overhaul of the business environment will be.

All of which means that in the short term, at least, Mr Lourenço will probably rely heavily on China to finance his plans for economic diversification. This risks deepening Luanda’s dependence on Beijing and extends what some see as China’s economic colonisation of Africa. Beijing, for its part, must be wary of increasing Angolan debt through oil-backed investment loans.

It needs to ensure that Angola, whose outlook has improved somewhat thanks to an oil price rebound and government polices, remains solvent. Otherwise default — and likely cuts in oil supplies to China — looms, a headache Beijing could well do without, as Venezuela’s downward spiral has already put a squeeze on an important source of crude.

Yigal Chazan is an Associate at Alaco, a London-based business intelligence consultancy

(The above is the text of an article published in the FT)