Over 2018, more countries in Sub-Saharan Africa (SSA) shifted away from traditional concessional sources of financing toward more market-based ones, increasing public debt vulnerability to currency and global interest rates risks.
Notably, aside from the rising spates of Eurobond issuances, interest in cheap and readily available Chinese loans increased considerably as they are usually characterized by less stringent rules, in contrast to loans from the west (including IMF and World Bank). Thus, China became the largest provider of bilateral loans (40.0% exposure) to SSA countries according to the World Bank.
In our view, the rising spate of commercial external loans has a higher risk content, as captured by greater vulnerability to commodity prices, global interest rates,
and currency movements. Clearly, policies and reforms that build resilience to these risks and use foreign capital to raise medium-term potential growth are needed.
Borrowings from China has undoubtedly played a part in boosting economic growth and indebtedness in SSA over the past decade and will continue to do so. However, the bigger debt risk comes from Eurobond issuances as we expect China to be more willing to renegotiate debt terms that holders of commercial debt, which are less strategic in their reasons for lending and do not have the loss absorption capacity of Beijing’s $3.0tn stockpile of foreign exchange reserves.