Museveni in trouble as China cuts lending to Africa

Chinese infrastructure lending to African countries is widely expected to slow over the next 1-2 years amid mounting debt sustainability concerns.
And for African leaders that had shifted allegiance from the West to China for huge loans might have to rethink their strategy.
China’s reduction in lending would mark a dramatic change over the past twenty years when Beijing emerged as a key source of development finance that helped Africa close its gaping $100 billion-a-year infrastructure deficit.
From 2000 to 2018, China extended $148bn of loans, mostly for infrastructure development, according to data from the China-Africa Research Initiative. But now, as a growing number of those countries are struggling to repay their debts, Chinese creditors are becoming understandably cautious about providing new loans to borrowers facing considerable financial duress.
At least 18 countries are currently renegotiating debts with China, with 12 others still in talks to restructure an estimated $28bn of Chinese loans, according to the New York-based consultancy Rhodium Group.
Uganda currently has $1.6 billion in loans to China. These loans largely finance major infrastructure projects.
President Yoweri Museveni has previously described his relationship with the Chinese as genuine friendship.
Uganda is heading toward a debt crisis. According to a senior official at the Bank of Uganda, unless the country is able to sustain a growth rate of at least 7 percent—which economic projections show Uganda will not do—the country will default on its payments. As is the case for many African countries, China is Uganda’s largest creditor, making up 39 percent of total debt this past fiscal year. If Uganda defaults, it is unclear how China will react.
Uganda is counting on China to provide $10bn to build much of its infrastructure backbone because Beijing offers the cheapest capital available, does not interfere in the African country’s controversy over homosexuality and has “big money” available, President Yoweri Museveni has argued in the past.
While it’s not expected that Chinese financing will completely dry up, future loans will likely be smaller, less risky and require more comprehensive feasibility plans than what had been accepted in the past.
In the coming decade, China is expected to consume less raw materials and be more selective in its foreign lending and investment activities.
In a report published on 10 November, the German insurer Allianz and its credit insurance subsidiary Euler Hermes revealed a disturbing finding: over the coming decade, China may no longer be able to provide Africa with the same amount of funding, taking the form of loans, investment and trade, as in the past.
China has a heavy debt burden. The country’s share of overall debt owed to G20 countries increased from 45% in 2013 to 63% at the end of 2019. China made significant investments in foreign countries to secure supply and promote its exports. What’s more, the country buys half of the world’s raw materials.
Besides the trade war with the United States, two reasons are behind this shift.
First, the Chinese Communist Party’s decision, driven by President Xi Jinping, to change the country’s growth model to what it calls a “dual circulation” strategy. The idea is to prioritise its domestic market in order to reduce the country’s reliance on imports while maintaining its export market shares. This refocusing is expected to help reduce cash outflows.
Second, the Chinese economic machine is set to continue to experience a systemic slowdown and see its pace of growth diminish from the 7% observed each year in the 2010s to somewhere in the range of 3.8% and 4.9% each year over the coming decade. This shift will further strain China’s overseas lending and investment activities.
Apparently, China has incurred significant losses on the loans it granted to multiple countries. It has become clear that several countries – mainly in Africa, including Angola, Ethiopia, the Republic of Congo and Zambia – are no longer in a position to repay the debt they owe China.
To stem its losses on the continent, China has drawn closer to the Paris Club, whose framework adopted on 13 November brought the country into a coordinated debt restructuring process. Going forward, China will be much more selective about the loans it grants.
Between 2021 and 2025, this cautious approach would deprive South Africa of $10.7bn, Kenya of $6.6bn, Angola of $5.2bn, Ethiopia of $4.7bn, Egypt of $1.3bn, Zambia of $1.1bn and Ghana of $0.9bn. Over a five-year period, these seven countries would lose a total of $30.5bn.
This shortfall would be especially problematic for Ethiopia since close to 15% of its external financing needs would be left uncovered.
China’s relative inward-looking shift and stricter monitoring of foreign investments made by public and private companies. Given their reliance on Chinese investment, Ethiopia, Ghana and Zambia would have the most to lose if the country scales back the funding it provides.
The slowdown in China’s growth would decrease its iron ore and oil and gas consumption, depriving exporting countries of foreign exchange earnings. Over a 10-year period, the revenue shortfall would amount to $9bn, with Angola alone losing $4.7bn.
China’s withdrawal would come at a bad time, as many loans are set to be refinanced in 2022 and 2023. It is doubtful that the markets would be willing to lend money cheaply to countries whose funding has been undermined in this way.
Here is what the analysts are saying about the future of Chinese loans to African countries, as reported by the South China Morning Post.
NEAR-TERM NERVOUSNESS: “As we know, China’s loans are mainly flowing to the growth and productive sectors in Africa. In this respect, in the short term, the uncertain economic situation in Africa will lead to reduced lending from China.” — Zhou Yuyuan, a senior fellow at the Centre for West Asian and African Studies at the Shanghai Institutes for International Studies
EXPECT MEDIUM-TERM LENDING SLOWDOWN: “I think there is that consensus even in China that the debt crisis this year has done China more harm than good. So, I think the hope is that the lending will slow down in the mid-term…[but] we are hearing African voices advocating for more lending from China, that China cannot stop lending or Africa will fall into a worse recession.” — Yun Sun, director of the China program at the Stimson Centre in Washington
BRI LENDING LIKELY TO CONTINUE: “I think it is clear that [Belt and Road] lending will be further curtailed due to the economic pressures brought on by COVID-19 but I think some projects in less-distressed countries will continue.” — Mark Bohlund, a senior credit research analyst at REDD Intelligence
Bohlund and a number of other experts agree that COVID-19 is only partially responsible for the anticipated lending slowdown, a trend that already started 2-3 years ago.