China faces pushback on Belt and Road indebtedness
China confronts controversy as debt concerns relating to Belt and Road pile up
11 Jul 2018 | Michael Marray

CHINA is facing growing controversy surrounding the debts associated with Belt and Road projects. Pakistani politicians are warning that if they are forced to go to the International Monetary Fund for assistance, the financing arrangements of the China Pakistan Economic Corridor will have to be fully disclosed.

At the same time Malaysia's new Prime Minister Mahathir Mohamad has ordered a temporary halt to construction work on the East Coast Rail Link (ECRL), and wants to use a planned official visit to China in August to renegotiate some of the terms of the deal.

Meanwhile China has hit back at US media articles on the so called "debt trap" that it has allegedly created in Sri Lanka, with Foreign Ministry spokesperson Lu Kang saying that the reports are "a gross distortion of facts", and are "either irresponsible or engineered by people with ulterior motives".

These controversies are mirrored by similar concerns across Africa about the build-up of debt associated with the Belt and Road. Nonetheless, many countries still see the Belt and Road Initiative as an opportunity to spur economic development. China clearly views some of the hostile media coverage as something that has to be viewed in the context of the deteriorating relationship with the United States on trade issues.

Pakistan is currently facing a drop in its foreign exchange reserves, and is heavily dependent on China for additional loans, having already built up sizeable debts associated with Belt and Road projects.

Pakistan is in the midst of an election campaign, and there are fears that once the 25 July election is out of the way the country might need to apply to the International Monetary Fund for assistance.

Fitch Ratings recently commented that falling reserves and a rising current account deficit are adding to Pakistan's external financing risks. "With the upcoming general elections at the end of July, the government has a limited time to address the country's debt obligations which are bound to accelerate in 2019, hence requiring concentrated policy efforts and swift implementation starting this fiscal year", it wrote.

According to a report in the Financial Times, Pakistani officials have told China that they need more loans to keep the China Pakistan Economic Corridor project moving forward. And an official quoted in the FT story said that it has shared its concerns with China that if it enters an IMF programme, then full details of financing agreements for the CPEC will have to be disclosed.

Malaysia has also signed up to sizeable Belt and Road projects, but these are now being questioned by the newly elected government.

Last week China Communications Construction Company (CCCC), the main contractor for the East Coast Rail Link, said that it had received notice from Malaysia Rail Link to temporarily suspend all work on the ECRL.

CCCC said that it regrets that the suspension comes at this point, as work has been progressing well. While the duration of the suspension has not been specified, CCCC has expressed concerns on incurring additional costs.

The 688 kilometre ECRL will run down the east coast of Peninsula Malaysia, and then across the country to connect with Port Klang on the West Coast.

Prime Minister Mahathir clearly believes that he can improve on the US$20 billion price tag, and this will be one of the most important topics on the agenda when he visits China in August. Work on two gas pipelines being built by a unit of China National Petroleum Corp has also been suspended, according to local media. Up for discussion are both contract prices and the interest rate on the associated debt.

In Sri Lanka, there has been a fierce argument domestically about the deal signed last year giving China Merchants Port Holdings a 70% stake in Hambantota Port.

At a regularly scheduled press conference on 3 July, Foreign Ministry Spokesperson Lu Kang adressed recent US media reports that China pressured Sri Lanka to hand over the equity stake in Hambantota Port having pushed it into a debt trap, and that China plans to use the port for military operations.

"The relevant reports, which are a gross distortion of facts, are either irresponsible or engineered by people with ulterior motives. We hope that the relevant media will not be so obsessed with fake news", said Kang.

"China encourages the relevant Chinese enterprises to conduct cooperation on this project with Sri Lanka in accordance with the business principles and on the basis of equality and mutual benefit", he added. "The Chinese financial institutions, in light of the needs of the Sri Lankan side, provided support for it to bridge the financing gap. With the advancement of the project, China adjusted the assets allocation despite some diffculties according to the wish of the Sri Lankan side. These moves are all conducive to our commercial cooperation. As to the people who fabricated the lie of the so-called "debt trap", if they are unable to offer tangible assistance to the developing countries, they can at least try to put the sincere cooperation between other countries in perspective."

Meanwhile, in another major area of Chinese involvement- East Africa- a 2 July report from Moody's has highlighted how East African countries' rising debt burdens is weighing on their fiscal and credit strength.

Moody's looks at four countries (Kenya, Rwanda, Tanzania and Uganda), and concludes that the fiscal and institutional profiles of all four sovereigns will be increasingly tested in coming years, managing risks associated with higher debt burdens, deteriorating affordability, increasing reliance on non-concessional financing and exchange rate risk.

The report, titled "Sovereigns -- East Africa: Institutional weakness and limited policy effectiveness constrain ability to manage higher debt burdens", notes that government debt is highest in Kenya, where Moody's expects it to approach 60% of GDP over the next two years. The rise in government debt will be most pronounced in Uganda, where Moody's expects it to increase by six percentage points by 2019, to reach 44.1% of GDP.

"Increasing debt burdens and deteriorating debt affordability, even when linked with public investment aimed at enhancing growth and generating foreign exchange to service outstanding debt, constrain fiscal space and weigh on our overall assessment of credit quality in Kenya, Rwanda, Tanzania, and Uganda," comments David Rogovic, Moody's Assistant Vice President and co-author of the report. "Their ability to contain any further rise in debt burdens for the foreseeable future, and direct limited domestic resources toward productive uses will be important credit considerations in all four countries."

Between 2012 and 2017, government debt burdens increased by 13 to 21 percentage points of GDP in all four countries. Measured as a percentage of government revenue, Rwanda has the lowest debt burden but has experienced the most rapid accumulation of debt, reflecting a transition in donor support from grants to concessional loans.

Moody's central scenario is for debt-to-GDP ratios to remain broadly stable in Tanzania, Rwanda, and Kenya. In Uganda, Moody's expects debt to increase by six percentage points of GDP to 44% in 2019.

Debt accumulation across the region has been largely driven by wide fiscal deficits, which have been biggest in Kenya due to infrastructure-related spending, combined with subdued revenue collection and the rising cost of debt.

A large and rising share of external, foreign-currency denominated debt leaves Tanzania, Rwanda, and Uganda vulnerable to exchange rate depreciation risk. The composition of this debt, and whether it is owed primarily to official sector creditors or commercial creditors affects both rollover risk and debt affordability.

The large share of concessional external debt means debt remains highly affordable in Rwanda and Tanzania, while the greater reliance on commercial borrowing in Kenya contributed to worsening debt affordability. In Uganda, debt affordability has also deteriorated, reflecting a gradual shift in the composition of the debt burden towards non-concessional external borrowing and higher domestic borrowing costs.

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