China in Africa: why Angola's economy is likely to rely on Chinese financing for decades to come

Since becoming Angolan president in 2017, Joao Lourenco has been trying to diversify the economy away from oil and to reduce the country's dependence on China.

To that end, Lourenco has been trying to align more with the United States and Europe, than China - as was the case with his predecessor, the late Jose Eduardo dos Santos, who attracted Chinese capital for the reconstruction of the economy after the 26-year civil war ended in 2002.

But observers say it might take decades to reduce the country's reliance on China, the key destination for Angolan crude petroleum, petroleum gas and asphalt mixtures.

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"The process of diversifying the economy away from a reliance on oil and Chinese debt will take decades to achieve, but the government is on the right track," said Gerrit van Rooyen, an economist at Oxford Economics Africa in South Africa.

Recent investment from the United States includes US$900 million in funding for a solar plant and a US$250 million proposal to fund the Lobito Atlantic Railway Corridor - an open access rail line from Lobito Port in Angola to the border with the Democratic Republic of the Congo.

But Luanda is also the continent's biggest recipient of Chinese financing, having borrowed US$42.6 billion from Chinese lenders - more than a quarter of China's total lending to African countries between 2000 and 2020.

Angola still needs China to fund the construction of the major infrastructure projects such as the 2,172 megawatt Chinese-built Caculo-Cabaca hydropower station in the north-central province of Cuanza Norte.

The project will be funded by Industrial and Commercial Bank of China (ICBC), while the Lobito oil refinery, along the Atlantic coast, will be built by China National Chemical Engineering.

Nevertheless, the situation is a long way from 2020, when crude oil prices slumped to below US$30 per barrel at the height of Covid-19 and Angola's debt situation reached a crisis.

Oil makes up 90 per cent of the country's exports, leaving it vulnerable whenever prices fall.

In response, Chinese lenders, including China Development Bank (CDB), gave a three-year debt payment freeze, ending in the second quarter of this year.

Part of the deal that Angola signed with Chinese lenders included a flexible payment agreement that required the resumption of payments if the price of oil rose above US$60 a barrel.

As oil prices surged last year to just above US$130 a barrel, Angola increased debt payments, resulting in the country's debt to Chinese creditors falling by US$1.5 billion in the first quarter of this year to a seven-year low of US$19.5 billion, according to data released by the central bank, Banco Nacional de Angola (BNA). Overall external debt stood at US$51 billion, in line with a year earlier.

According to Van Rooyen, Angola's finance minister said last year that the government would accelerate its debt repayments while oil prices were still high.

"This was a prudent step, which gives the government more spending flexibility now that oil prices have normalised," van Rooyen said.

Lately crude prices have dropped to about US$70 a barrel and a combination of much-lower oil prices and slightly lower oil production is expected to cause a sharp decline in Angola's petrodollar inflows this year.

Van Rooyen said the combination would make it harder for the country to service its foreign debt.

The decrease in external indebtedness in the first quarter was dominated by a US$1.3 billion drop in debt owed to banks, with debt owed to bilateral creditors falling by US$231 million, according to BNA statistics.

According to a new report by REDD Intelligence, a provider of intelligence and data on emerging market sovereigns and companies, the drop in Chinese debt was in line with movements in the third quarter of last year, when Angola's debt to Chinese creditors fell by US$939 million.

It indicates that debt owed to CDB, Angola's largest external creditor by far with around 26 per cent of total external debt in January, has been the driving factor in Angola's decreasing indebtedness to Chinese creditors, according to the report.

Mark Bohlund, a senior credit research analyst at REDD Intelligence, said the debt payments were being accelerated to enable new disbursements for projects such as Caculo Cabaca while still maintaining the credit limits set by Sinosure, the Chinese provider of export credit insurance.

"These payments go beyond what is mandated in the flexible payment agreement clause in the three-year debt moratorium," Bohlund said.

He said the recent drop in the Angolan kwanza (AOA) was a way to protect external debt payments amid lower oil prices as it reduced government expenditure in US dollar terms.

According to Bohlund, the decrease in Chinese debt was linked to a desire to keep Chinese overall exposure to Angola at a constant level as ICBC disbursed funds for the Caculo Cabaca hydropower project.

ICBC is China's second-largest creditor to Angola, with around US$5 billion outstanding in the first quarter of this year, according to REDD Intelligence calculations based on BNA and Ministry of Finance data.

REDD Intelligence said external debt disbursements were expected to rise to AOA 985 billion (US$1.7 billion) in June.

"This is likely to be connected to the Caculo Cabaca project although disbursements connected to the ongoing construction of the Dr Antonio Agostinho Neto International Airport, also led by a Chinese firm, is also a possibility," REDD Intelligence said.

"We expect loan disbursements connected to these two projects to push Angola's debt to Chinese creditors back above US$20 billion in the second half of 2023."

Aly-Khan Satchu, a sub-Saharan Africa geoeconomic analyst, said that under the Lourenco administration, Angola had been looking to rein in the cowboy culture and freewheeling ways of the last days of the dos Santos era.

"The current administration has made up a great deal of ground in bringing Angola's balance sheet under control and putting the economy on a firmer footing. I expect the reform programme to continue to gain traction," Satchu said.

He said the administration used last year's Ukraine correlated oil price spike to pay down debt and that given China was Angola's largest creditor, the debt pay-down was sending a message about better balance sheet management.

"The signalling effect to China is a very subtle but powerful one that Angola [notwithstanding the three-year moratorium] remains a solid credit. I, therefore, fully expect China to fund both the Caculo Cabaca hydropower project and the Lobito refinery which are value additive projects," Satchu said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.