Moody’s: Chinese lending to Sub-Saharan Africa can support growth, but brings risks

Moody’s has published a report showing that while the increase in Chinese lending to Sub Saharan Africa has the potential to support economic growth, it also amplifies credit risks for African countries with already high debt burdens and deteriorating external positions..

“Unless African investment financed by Chinese loans generates substantial economic gains that boost debt servicing capacity of Sub-Saharan African governments, the credit implications of such lending include higher debt burdens, weaker debt affordability and weaker external positions,” said David Rogovic, a Moody’s Assistant Vice President – Analyst and co-author of the report. “China’s willingness to renegotiate existing loans and the terms of these renegotiations will influence credit trajectories in Sub-Saharan Africa in the coming years.”

Report’s key points

• Chinese lending to SSA governments has increased tenfold to more than $10 billion annually between 2012 and 2017, from less than $1 billion in 2001
• Like any infrastructure-related borrowing, unless it generates substantial economic gains boosting debt servicing capacity, credit implications will include higher debt burdens, weaker debt affordability and weaker external positions
• Angola (B3 stable), Republic of the Congo (Caa2 stable), and Zambia (Caa1 stable) are among the most indebted to Chinese creditors; while in Ghana (B3 stable), Angola, Zambia, and Nigeria (B2 stable) interest payments already absorb more than 20% of revenue
• Less transparent terms and debt sustainability conditions attached to China’s loans also weigh on SSA sovereigns’ fiscal strength, with many debt servicing with a natural resource that could fall in price
• Some SSA sovereigns face large bond maturities early next decade, so the scope to renegotiate some outstanding Chinese loans will influence their liquidity risks

Full press release

China’s increased lending to governments in Sub-Saharan Africa has the potential to support economic growth, but also amplifies credit risks for countries with already high debt burdens and deteriorating external positions, Moody’s Investors Service said in a report today.

“Unless African investment financed by Chinese loans generates substantial economic gains that boost debt servicing capacity of Sub-Saharan African governments, the credit implications of such lending include higher debt burdens, weaker debt affordability and weaker external positions,” said David Rogovic, a Moody’s Assistant Vice President – Analyst and co-author of the report. “China’s willingness to renegotiate existing loans and the terms of these renegotiations will influence credit trajectories in Sub-Saharan Africa in the coming years.”

Chinese lending to SSA governments rose nearly tenfold to more than $10 billion a year between 2012 and 2017, from less than $1 billion in 2001. Much of the lending has focused on infrastructure projects, including the power, transport, and communication sectors.

Angola (B3 stable), Republic of the Congo (Caa2 stable), and Zambia (Caa1 stable) are among the most indebted to Chinese creditors. In Ghana (B3 stable), Angola, Zambia , and Nigeria (B2 stable), interest payments already absorb more than 20% of revenue. Zambia’s external position is particularly fragile, given its very low foreign exchange reserves.

A further increase in China’s lending – or even maintaining the current pace of lending – should go some way to addressing Africa’s financing gap. However, the lack of transparency over the conditions attached to Chinese lending and a lack of reform and governance requirements, compared with those required by multilateral official creditors, may limit the long-term benefits.

In some cases, where Chinese lenders have provided liquidity relief, this has come with higher resource concessions, which reduce future export earnings. Even if debt restructuring alleviates immediate liquidity pressure, the loss of natural resources revenue or other assets is credit negative.