The crushing weight of China’s debt burden on Eurasia
Emerging European economies were already facing heavy debt burdens before the pandemic. Now they have been put under new pressure as they struggle to boost spending to support their flagging economies and fund healthcare systems that are creaking under the weight of all the coronavirus (COVID-19) patients, just as tax revenues slump because of the economic shock of the pandemic.
Four countries were identified back in 2018 as most at risk from debt distress due to huge loans they took out to participate in China’s Belt and Road (BRI) initiative. bne IntelliNews looks at how those four countries – Kyrgyzstan, Mongolia, Montenegro and Tajikistan – have handled the crisis.
These four countries are not alone in embarking on major infrastructure projects under the BRI (initially called One Belt One Road, or OBOR) launched by Beijing to create a huge web of land and sea trading routes, primarily from East Asia to Europe, but also linking in Africa and parts of Latin America.
Emerging Europe plays an important role in the BRI; the concept was initially launched by Chinese President Xi Jinping during a trip to Kazakhstan in 2013.
The Eurasian countries are part of a land bridge that links China to Europe, but the BRI also goes on through the Central and Southeast European countries that are also part of the transit routes as well as potential manufacturing hubs for Central and Western Europe for Chinese business.
The land bridge also has the added appeal of being on dry land and so well away from the sea lanes linking Asia to Europe, the main route in the transit of goods, and ultimately controlled by the powerful US Navy. China is playing a very long game to improve both its commerce as well as reduces its security pressure points should it get into a serious clash with Washington.
Enthusiasm for Chinese investment on the wane
Following the 2008 international financial crisis, Chinese firms started snapping up industrial and commercial assets in the region, and at the same time launched transport and energy infrastructure projects as part of the BRI. Back in 2012, China launched the 17+1 (now 16+1 after Lithuania pulled out this year) format for co-operation with the region.
While many governments in the region initially welcomed the billions of dollars flowing from Chinese coffers, especially during and immediately after the Great Recession, relations with some have since soured.
The collapse of conglomerate CEFC China Energy, which had bought up numerous companies in the Czech Republic in particular, caused Prague to distance itself from Beijing as enthusiasm for China’s investment drive began to wane.
More recently, there were reports of an exodus of Chinese investment from Russia, which failed to persuade China to finance construction of some major transport and energy projects. Meanwhile, Romania scrapped talks with China’s nuclear power company CGN in favour of a group of Western companies for the project to expand its Cernavoda nuclear power plant (NPP). Lithuania took the strongest stance against China in 2021, when it first pulled out of the 17+1 format, then announced plans to establish reciprocal diplomatic offices with Taiwan, causing China to withdraw its ambassador from Vilnius.
The worsening of relations is partly a consequence of deals that collapsed or projects that have progressed too slowly – even the pro-Chinese Serbian government rebuked China Machinery Engineering Corporation (CMEC) for its work on the Kostolac B power plant – but it also comes in the context of China’s struggle for global supremacy with the US and Washington’s diplomatic offensive in the region. The latter has persuaded numerous Central and Southeast European states to sign up to a declaration on communications security effectively barring China’s Huawei from participating in 5G infrastructure projects.
There has also been a volley of reports and op-eds from US-based think-tanks on debt dependency and other risks of co-operation with Beijing. China is rapidly replacing Russia as the geopolitical bogeyman in the barrage of invective churned out by the American Beltway think-tank industry.
Beasts of burden
Even viewed through the lens of the rivalry between the two superpowers, there are growing and legitimate concerns about the debt burden carried by some of the poorer countries in the region.
Back in 2017, a study by the Washington-based think-tank the Center for Global Development found that of the 68 countries hosting OBOR-funded projects, 23 were at risk of debt distress, and in eight, future OBOR-related financing will “significantly add to the risk of debt distress”. In addition to the three Central Asian economies and Montenegro, the list of eight also included Djibouti, Laos PDR, the Maldives and Pakistan, all of which have been the recipients of large amounts of funding for infrastructure projects.
This, of course, was before the pandemic. The economic dislocation caused by lockdowns and disrupted supply chains has put additional pressure on economies across the Emerging Europe region, especially on those outside the European Union, those with a large tourism sector (like Montenegro) and those whose finances were shaky in the first place. Among the countries identified at risk of debt distress before the pandemic, Kyrgyzstan, Montenegro and Tajikistan have all sought to delay or restructure their debt repayments since.
Another issue with Chinese debt is that loan agreements typically have strict secrecy clauses, which means citizens of the countries involved generally don’t know what their governments have signed up for.
As a March 2021 study by the Center for Global Development think-tank says: “Neither policymakers nor scholars know if Chinese loan contracts would help or hobble borrowers, because few independent observers have seen them.”
The study analysed 100 of the approximately 2,000 land agreements signed between developing countries and Chinese state lenders since the early 2000s. It acknowledges that all lenders have some influence over debtors to maximise their prospects of repayment. However, says the report, “China’s contracts also contain unique provisions, such as broad borrower confidentiality undertakings, the promise to exclude Chinese lenders from Paris Club and other collective restructuring initiatives, and expansive cross-defaults designed to bolster China’s position in the borrowing country.”
Kyrgyzstan owes $1.8bn to China, which is over 40% of its total external debt, estimated at $4.8bn-5bn. When the coronacrisis hit, Bishkek asked Beijing for debt relief as early as April 2020, after taking out loans for projects linked to the BRI.
In November 2020 – the month after the third revolution in Kyrgyzstan’s post-independence history plunged the country into political instability – China allowed the deferral of $35mn until 2022-24 at an interest rate of 2%. Earlier in the year, Kyrgyzstan secured a Paris Club agreement to delay payment of $11mn of debt.
After winning the January presidential election, Sadyr Japarov told state news agency Kabar that if Kyrgyzstan did not pay its debts to China on time “we will lose many of our properties”. The following month, Ruslan Tatikov of the Ministry of Economy and Finance’s State Debt Department told Akipress that Kyrgyzstan must pay off $88mn of debt to China this year. As reported by RFE/RL, there are questions over whether Kyrgyzstan will be able to cover its interest payments for the Chinese-financed reconstruction of the Bishkek power plant.
Beijing is unlikely to be very sympathetic to any appeals from Japarov, whose brand of populism has not gone down well with Chinese officials, and whose election victory had a notably cool reception from China. Nor will the attempts to oust Canada's Centerra Gold from the Kumtor gold mine help the country secure investment from other countries.
Back in 2017, the IMF approved a $5.5bn bailout package for Mongolia that included a three-year extension to a RMB15bn swap agreement with the People’s Bank of China. Three years later, at the start of the pandemic, Mongolia was seen as very vulnerable as a resource-dependent economy whose supply chains and markets had been disrupted. Mongolia received more than $500mn in coronavirus (COVID-19) relief in 2020, of which $326mn was via foreign loans. This pushed public debt towards 70% of GDP. Total public and private debt has reached nearly 300% of economic output.
Overall, the country weathered the pandemic better than expected, and did not slide into default. Rating agency Moody’s noted in March that Mongolia’s external vulnerabilities declined due to the faster than expected recovery in mining exports. Fitch forecasts Mongolia's economy to rebound by 5.0% in 2021, following a contraction of 5.4% in 2020. Growth of 15.5% year on year was reported in 1Q21, due in large part to strong export performance.
The rating agency Moody’s lifted Mongolia's outlook to stable from negative, affirming its B3 rating, which, it said, reflected its view that liquidity risks and external pressures had stabilised.
“Higher government borrowing requirements resulting from sizeable stimulus in 2020 were financed primarily through a combination of concessional sources and a drawdown on fiscal reserves, thus relieving liquidity pressures. Recent refinancing has also reduced upcoming maturities in 2021 and 2022,” according to Moody’s. The refinancing, which took place in September 2020, “resulted in a substantial reduction of obligations due in 2021 and part of 2022,” rating agencies said.
According to Moody’s, “Apart from the $133mn remaining maturity in 2021 (post the debt-refinancing), Mongolia's upcoming refinancing needs include about $800mn due in 2022 and 2023 each, and $600mn in 2024. At these levels, Mongolia's debt maturities are not substantial compared with peers.”
Fellow rating agency Fitch forecasts general government debt will edge down by 2pp to 74% of GDP by end-2021, and in the medium term, public debt will go on “modest downward trajectory”.
“The sovereign faces no marketable external bond maturities until December 2022. Foreign currency reserves stood at a record high of $4.8bn at end-1Q21. Fitch forecasts FX reserves will rise to $5bn by end-2021, equivalent to 5.6x current-external payments, and against approximately $3.2bn in sovereign external debt maturities over 2022-2024.”
Montenegro originally sought funding for the Bar-Boljare motorway that will run across the country from the Adriatic port of Bar to the Serbian border from a variety of international lenders. The highway will replace the existing route over difficult mountainous terrain that has a high level of accidents and fatalities. The terrain is also set to make it the most expensive road per kilometre in Europe. As talks with other lenders fell through, Podgorica finally secured a loan from Chinese EximBank to cover 85% of the project cost. The government signed the $944mn loan deal with Exim Bank in 2014, and started drawing funds in 2015.
Five years later, Montenegro suffered the worst economic contraction across emerging Europe, as the tourism sector in particular slumped. A Eurobond issued days after the new government took office in December 2020 – that officials said was needed to save the economy from collapse – pushed up debt to 104.8% of GDP in 2020, according to a World Bank estimate.
Earlier this year, Montenegro was struggling to repay the first instalment of the loan and appealed to the EU for help. However, in July, the government signed an agreement to hedge its debt to Exim Bank, enabling it to lower the interest rate on the loan to 0.88% in euros from 2% in US dollars. It repaid the instalment later the same month.
Pre-pandemic, following warnings from international financial institutions (IFIs) over the size of the debt compared to Montenegro’s tiny economy, the government had reined in expenditures, but was forced to hike spending again in 2020. In the first half of this year, spending was down compared to 2020, and Montenegro reported its biggest budget surplus ever in July.
Back in 2011, when Tajikistan was unable to pay back a debt to China, Dushanbe agreed to hand over 1,158 square kilometres of disputed land in the Central Asian country (amounting to 0.7% of its territory) in exchange for a debt write-off. As Chinese state-controlled banks embarked on a lending spree for BRI projects, this agreement fuelled concerns over the potential for China to use its position as a creditor to potentially take land and assets from distressed borrowers.
As of October 2020, Tajikistan, the poorest country in Emerging Europe, had external debt of $3.2bn, after it increased by $238mn during the year, according to an analysis by the Central Asian Bureau for Analytical Reporting (CABAR.asia). External indebtedness has risen steadily since 2014, from 23% of GDP to 40% of GDP. Tajikistan’s single largest creditor since 2008 is the Export-Import Bank of China (Eximbank).
The country’s second-largest debt is its September 2017 debut Eurobond, issued partly to fund construction of the massive Rogun dam. London-based political risk analyst and writer Maximilian Hess called the bond a “cautionary tale” in a comment for Eurasianet and bne IntelliNews wrote an article questioning the government’s ability to service the debt shortly after it was issued. With the March 2020 sell-off as the coronavirus started to spread around the world, the bond collapsed to as low as 60 cents on the dollar, and made only a modest recovery.
In 2020, Tajikistan was one of the low-income countries allowed by finance ministers and heads of the central banks of the G20 countries to temporarily suspend debt servicing during the pandemic. The government signed a memorandum with the Paris Club on September 3, 2020, under which it suspended payments on debt obligations to Chinese Eximbank as well as the Kuwait Fund for Arab Economic Development and German development bank KfW.
Despite this, during the pandemic, the government signed off five new loan projects for $459.5mn, and plans to request loans of $562mn from international partners this year, though as Hess writes, it is “anyone’s guess where Dushanbe will secure the $562mn in fresh loans it says it is seeking this year. As 2027 approaches, the spectre of its $500mn Eurobond repayment risks putting off institutional creditors, China and other potential deep-pocketed saviours such as the Gulf states.”