Will China’s “Debt Diplomacy” Backfire?

Authored by Tim Daiss via Oilprice.com,

Angola, Africa’s second largest oil producer, has ramped up its financial ties with Beijing, but perhaps to its own detriment, The country’s state newspaper Jornal de Angola said on Wednesday that the country had secured $2 billion in Chinese funding from the China Development Bank for infrastructure projects. Angolan President João Lourenco secured the financing during his first visit to Beijing, the report added.

Details of the deal were not released, according to various media outlets. A Reuters report said on Wednesday that Angola is in the process of trying to diversify its economy since a fall in the price of crude in 2014 plunged it into recession. Inflation is running at more than 20 percent per year and at least one in five of workers in the country are unemployed.

News of the funding deal comes just a week after Fitch Ratings released negative news for the African oil producer. It said that Angola is expected to have a GDP growth rate of 1.5 percent in 2018, given the growing tendency for its declining trend witnessed in oil production, down from a previous 2.8 percent growth rate predicted earlier.

The ratings agency also trimmed its GDP growth projection figures for the country 2019 but increased that projection for 2020 from a previous growth rate projection of 2.2 percent to 2.6 percent.

The Chinese cash infusion also comes as President Lourenco solidifies his power in order to help push through reform measures, promising to oversee a so-called “economic miracle” by opening up the country of 29 million people to foreign investment as well as opening up the tourism sector and prioritizing agriculture.

China’s string of pearls

Angola is the latest in a line of countries stretching from Asia, to the middle east and Africa that are inking massive infrastructure deals with China.

One of the staunchest critics of China’s infrastructure loan model strategy has been the Trump Administration. U.S. Vice President Mike Pence said last week that Beijing was using “debt diplomacy” to expand its global influence in countries ranging from Asia to Africa to Europe to even Latin America. He cited the Sri Lankan port as an example of massive Chinese funding, which he said could soon become a forward military base for Beijing’s growing blue-water navy.

Pence said that the terms of Chinese “loans are opaque at best, and the benefits flow overwhelmingly to Beijing,” adding that “China uses so-called ‘debt diplomacy’ to expand its influence.”

“Just ask Sri Lanka, which took on massive debt to let Chinese state companies build a port with questionable commercial value. Two years ago, that country could no longer afford its payments – so Beijing pressured Sri Lanka to deliver the new port directly into Chinese hands. It may soon become a forward military base for China’s growing blue-water navy,” Pence said.

It appears, however, that other countries may be finally waking up to the dangers of over reliance on Chinese debt to fund massive infrastructure projects. Sierra Leone nixed plans this week to build a controversial, $318 million airport outside the capital of Freetown with a Chinese company and funded by Chinese loans, the BBC reported on Wednesday.

Its cancellation comes as both Pakistan and Malaysia also put on the brakes over Chinese infrastructure loans in recent months. Sierra Leone’s decision, however, is the first time an African government has canceled an already announced, major China-backed deal.

Swimming in Chinese debt

However, it appears that Angola may have already been in over its head even before agreeing to the recent $2 billion infrastructure deal. The government said earlier this year its debt will rise to $77.3 billion, or 70.8 percent of GDP, by the end of 2018. Of that amount, the country already owes China $21.5 billion.

Another worry is that if Angola is unable to repay its massive debt to China, Beijing could gain control over the country’s oil production, in a possible repeat performance of what has been happening in debt-laden Venezuela.

In April, a report from the Washington-based Center for Strategic & International Studies (CSIS) said that as Venezuela comes apart at the seams, it will hand over more and more control of it natural resources to China, and even more power over its institutions.

The report alleges that Venezuela’s economic problems have been made worse by China. Taking advantage of Venezuela’s desperation, China has managed to convince Caracas to sign “one-sided financial agreements” that perpetuate the economic malaise afflicting the country, the report claims.

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