ANGOLA VS CHINA INVESTMENT
Analysts warn of risks of Angola's dependence on Chinese funding
According to experts, Angola's high indebtedness will limit future investments. Chinese commitment in the country is recognized, but construction costs would have been high. Jo?o Louren?o's reforms would be working.
Fitch Solutions said on Sunday (Aug. 23) that the oil loan model, widely used by China in financing Africa, notably Angola, will increase on the continent, but warns of risks to both.
"While oil loans reduce the risk of payment to Chinese lenders by avoiding relying on the ability of the Angolan Government to meet debt obligations, we note that Angola's high levels of indebtedness, representing an estimated 71.4% of GDP in 2018 will limit capacity to support infrastructure projects and restrict the growth of the construction industry in the coming years, "write analysts.
In a note on Angola's growing reliance on Chinese funding, which will reach more than 40% of total debt following a $ 11 billion financing agreement for 78 infrastructure projects agreed in September in Beijing, Fitch Solutions writes that "the costs of servicing debt will increase and with the decline in oil revenues, the budget is expected to remain in deficit by 2027."
Despite the risks of this model, Fitch Solutions recognizes that Chinese support for Africa in general and Angola in particular is expected to accentuate due to the financing difficulties faced by African countries due to the high levels of public debt to which have been subjected to the decline in commodity prices since 2014 and to the consequent impact on public accounts and economic growth that has thrown Angola into recession since 2016 and continued into the first quarter of this year.
"This agreement nevertheless reflects China's considerable commitment to the development of infrastructure in Angola, which has been one of the largest beneficiaries of Chinese funding in sub-Saharan Africa," reads the note sent to investors.
Role of China
"China is the largest foreign funder of infrastructures in Angola, totaling $ 22.4 billion, according to our database, and Chinese funding was key to the progress of major infrastructure projects - including the 6, $ 4 billion for the new Luanda Airport, $ 4.5 billion for the Caculo Caba?a hydroelectric plant project and the reconstruction of the Benguela railways, estimated at $ 1.8 billion, "added the analysts.These and other financing made the construction sector grow by almost 17.5% a year between 2008 and 2017, according to Fitch Solutions, but the pace is expected to slow to almost a third (6.4%) by 2027.
The $ 11 billion financial aid package, worth one-sixth of the total promised to sub-Saharan Africa at the China Africa Cooperation Forum, is proof of this Chinese commitment, but high levels of public debt, declining oil revenues and the limited budget space to support infrastructure development will keep economic growth below potential, "analysts conclude.
Sensible indebtedness
Also on Sunday, the consultant Economist Intelligence Unit (EIU) warned of the need for Angola to "make sensible investments" in danger of entering into default, due to the high level of indebtedness.
"The debt payment is already the largest expense item in Angola and the country has to balance its need for investment with sensible debt, if it wants to avoid a default situation," write the experts of the unit of economic analysis of the British magazine The Economist.
According to a note sent to investors on the relationship between China and Angola, analysts warn of the new $ 11 billion financing package agreed between the authorities of the two countries at the China-Africa Cooperation Forum (FOCAC), which took place at the beginning of the month in Beijing, and in which the Angolan President, Jo?o Louren?o, personally participated.
"China's new credit package is significant, but in spite of helping to unlock financing to pay for the much-needed investments, it will also increase the burden of the national debt," says the EIU, noting that the agreement is reached at a time when that Angola has already secured $ 4.5 billion from the International Monetary Fund (IMF).
In December last year, according to official figures quoted by Economist's economic analysis unit, Angola owed China more than $ 21 billion, "of which $ 5.2 billion for the China Import and Export Bank , and the remainder to public banks. "
This metido, the EIU notes, "hás attracted criticismo both inside and outside Angola, especially in relation to importa of Chinese materials and labor, which does little to create local jobs and to develop the national manufacturing sector." The same is true, analysts conclude, with the terms of the loan payments, "which raises concerns about whether the loans are really beneficial to Angola."
Angola needs more transparency and accountability in infrastructure investment, where it has spent $ 87.5 billion over the past 15 years without great results, a study by the British Institute of International Relations suggests.
These are some of the reforms suggested to address the main weaknesses identified, such as weak oversight of public investment, over-ambition and unrealistic budgets, and mistakes in feasibility or corruption risk planning.
"In addition, pro-cyclical financing has resulted in the accumulation of public debt and has accentuated a structural vulnerability to the fluctuation of oil prices," writes the author, S?ren Kirk Jensen .
Jo?o Louren?o
"The Angolan Infrastructure Ambitions Along the Highs and Lows - Policies, Governance and Reforms", in the literal translation to Portuguese), the analysis of the Chatham House focuses on the period between 2003 and 2016.
This coincides with the post-civil war, when the Angolan Government advanced with a program of repair, expansion and modernization of its infrastructures to promote social and economic development.
The regime of José Eduardo dos Santos was aided by the economic boost given not only by revenues from oil exploration, but also by the availability of credit for financing these works, mainly offered by China.
High costs of corruption
But Jensen analyzed in detail the investment made in electricity and road networks and concluded that the cost-benefit ratio of the $ 87.5 billion investment between 2002 and 2015 is low.
The electricity service remains without reaching more than half of the population and suffers from frequent failures and the road network has been repaired or expanded at an inconsistent pace.
In a rough estimate, the African expert estimated that each kilometer of road built or rehabilitated would have cost, at the peak of investment, between 2006 and 2008, close to $ 682,762.
According to Soren, studies by the World Bank and the nongovernmental organization Transparency International have found signs that construction and road maintenance costs are higher in countries with higher levels of corruption."This finding seems to support the notion that unit costs are higher in Angola than in the rest of the continent because Angola has suffered over time from high levels of corruption," he adds.
Advances and new perspectives
The author of the report understands that the reforms introduced by Angolan President Jo?o Louren?o since their entry into office in 2017 are aimed at improving governance and fighting corruption.
"The announced reforms include some that directly and indirectly address infrastructure governance, although these must still be developed in detail and implemented," as the creation of a new Ministry of Economy and Planning exemplifies.
S?ren Kirk Jensen lists some necessary measures, such as making the National Public Procurement Portal operational and recording all ongoing bidding processes, as well as publicizing the registration of construction companies involved in public works projects.
It also advocates that Angola should adopt international transparency standards, such as disseminating elements such as the scope of the project, cost and completion date and investments should be accompanied by studies of social impact and economic viability.
Rui Leite
Text origin: DW (amp.dw.com)