Page 14 - bne_Magazine_April_2018

14 I Companies & Markets bne April 2018
Chinese loans hike risk of debt distress in Central Asia
bne IntelliNews
Eight countries including three Central Asian economies and Montenegro are at rising risk of debt distress as they take out Chinese loans extended under the One Belt One Road Initiative (OBOR).
Adopted in 2017, the OBOR is a global initiative spanning three continents that aims to link China to Western Europe
by reviving overland and maritime trade routes. Under the OBOR up to $8 trillion is planned to be invested into transport, energy, and telecommunications infrastructure across Asia, Africa and Europe.
However, a new study by the Washington-based think tank the Center for Global Development finds that of the 68 countries hosting OBOR-funded projects, 23 are currently at risk of
debt distress, and in eight, future OBOR-related financing will “significantly add to the risk of debt distress”.
The eight countries most at risk include Kyrgyzstan, Mongolia and Tajikistan in Central Asia, as well as Montenegro, and four other economies – Djibouti, Laos PDR, the Maldives and Pakistan. All of these countries have been the recipients of large amounts of funding for infrastructure projects and as
a result the proportion of external debt that is owed to China and its banks will rise, sometimes dramatically, says the report published on March 4.
“Important questions arise on sustainable financing of the ini- tiative within OBOR countries, and how the Chinese govern- ment will position itself on debt sustainability. Infrastructure financing, which often entails lending to sovereigns or the use of a sovereign guarantee, can create challenges for sovereign debt sustainability,” write the report’s authors.
“It remains unclear the degree to which OBOR, a Chinese- led bilateral initiative that seeks to employ some multilateral mechanisms to achieve its financing goals, will be guided by multilateral standards on debt sustainability.”
“Our research makes clear that China needs to adopt standards and improve its debt practices – and soon,” said Scott Morris,
a senior fellow at the Center for Global Development and a co-author of the paper.
Specifically, there are concerns that the sheer volume of
debt that some countries involved in the OBOR will owe to China will leave countries with debt “overhangs” that will “impede sound public investment and economic growth more generally”. The political implications of increased dependence
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on Chinese credit are also a concern; tensions are already evident for example in Sri Lanka, where activists clashed with police over the new industrial zone at Hambantota port.
Yet these concerns have often been ignored given the large and growing need for infrastructure investment in many countries around the world. The Asian Development Bank (ADB) has estimated an infrastructure gap – the difference between the amount being spent on infrastructure and the amount that’s needed to keep up with demand – of up to $1.7 trillion per year in Asia. A separate report by the Global
“Of the 68 countries hosting OBOR- funded projects, 23 are currently at risk of debt distress”
Infrastructure Hub, a G20 initiative, shows that the four regional economic hubs in the CEE/CIS region – Russia, Kazakhstan, Turkey and Poland – are facing a combined infrastructure gap of $1.307 trillion over the next 23 years.
“Belt and Road provides something that countries desperately want – financing for infrastructure ... But when it comes to this type of lending, there can be too much of a good thing,” said John Hurley, a visiting fellow at the Center for Global Development and a co-author of the study.
Chinese state controlled banks have also been more amenable to funding, for example, coal-fired power plants and other projects that are increasingly shunned by international development banks on environmental grounds. In the Western Balkans, the plethora of new coal power plants in the works are almost invariably backed by Chinese banks and planned
to be built by Chinese engineering firms.
The Center for Global Development study looks at the 23 coun- tries currently at risk of debt distress and incorporates the OBOR lending pipeline into each country’s debt as of the end of 2016 to estimate which are likely to suffer from debt distress as a result.
Of the eight countries, the Maldives’ debt is set to reach the highest level of 109% of GDP this year. Within the CEE/CIS region, Mongolia’s will be the highest, rising from 62.1% of GDP in 2016 to 89% this year, followed by Montenegro’s – up more gradually from 76.1% in 2015 to 80.9% in 2018.