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A surge in crude oil prices following the Russian invasion of Ukraine is hurting many economies around the world, but high prices are helping Angola, the second-largest oil producer in Sub-Saharan Africa, pay off debts to Chinese lenders.
Angola's oil revenue rose from US$1.4 billion in April to US$2.1 billion in May, according to data from the country's finance ministry. Brent crude was trading at US$113.12 a barrel on Friday, up more than 48 per cent since the start of this year.
Data from Angola's central bank indicates that Luanda resumed principal repayments of Chinese debt in the first quarter of this year, 18 months before the scheduled end of a three-year debt moratorium agreed with Chinese lenders in June 2020.
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According to market research company REDD Intelligence, debt owed to Chinese creditors decreased by US$351 million in the first quarter of this year to US$21.4 billion, after having been stable at close to US$22 billion for the past two years.
Angola fell into recession between 2016 and 2020 following a crisis caused by falling oil prices, and China agreed in 2020 to allow it to defer debt payments after the Covid-19 pandemic worsened its economic prospects.
The debt payment freeze was to end in the second quarter of next year.
In early 2020, global crude oil prices had plummeted to below US$30 a barrel, pushing oil-producing countries such as Angola into more financial misery. Oil makes up 90 per cent of the country's exports, leaving it vulnerable whenever prices fall.
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, which has been the case since June last year.
Mark Bohlund, senior analyst at REDD Intelligence, said a decline in Angola's foreign exchange reserves to US$13.7 billion by June 17, despite a US$1.75 billion Eurobond sale in April and higher oil revenue, indicates that the Angolan government's debt repayments probably accelerated further during the second quarter of this year.
Bohlund said the 2020 moratorium gave Angola crucial financial breathing room at a time when oil prices were cratering due to the spread of Covid-19.
"The agreement deferred principal repayments to both China Development Bank and Industrial and Commercial Bank of China until the second quarter of 2023," he said.
Bohlund said Angolan finance ministry data indicates that the country's outstanding debt to China Development Bank was constant at around US$13.5 billion.
The country has benefited from the recent increase in oil prices. Photo: AFP alt=The country has benefited from the recent increase in oil prices. Photo: AFP>
Angola has borrowed US$42.6 billion from Chinese lenders - around a third of China's total lending to African countries between 2000 and 2020 - which it repays in the form of oil shipments.
Deborah Brautigam, a professor of international political economy at Johns Hopkins University and founding director of the China Africa Research Initiative, said Angolan Finance Minister Vera Daves and the head of the country's debt management office, Walter Pacheco, are very experienced and savvy negotiators.
"They got a good moratorium from CDB and ICBC, something no other commercial lender provided," she said.
Brautigam said Chinese creditors accounted for 54 per cent of Angola's scheduled debt servicing obligations this year. "Yet I wouldn't say Angola's debt troubles are caused by China," she said. "What's more salient is the instability in oil prices, especially the steep drop that created a balance of payments problem."
She said the flexible payment agreement had helped align debt servicing with oil earnings, but "as long as Angola remains dependent on oil, these challenges will resurface".
Following the upswing in oil prices this year, Angola has more than doubled its expected earnings from the commodity and is using the additional cash and the appreciation of its currency to address its debt load, said Marisa Lourenco, an analyst at Control Risks, a global risk consultancy.
She said shipments of oil to China aren't physical barrels, but money that goes into an escrow account. As Angola's debt is denominated in US dollars, if the kwanza - the local currency - weakens, the debt load grows.
"The kwanza has appreciated a lot since the start of 2022, and it's an easier time to service existing debt - you need less kwanza to do so, saving the government cash," Lourenco said.
She said Angola's debt troubles stem from gross fiscal mismanagement under former president Jose Eduardo dos Santos, external shocks like previous falls in oil prices, and the lack of economic diversification that makes oil the lifeblood of the economy.
Dominik Kopinski, an associate professor at the University of Wroclaw and the co-founder of the Polish Centre for African Studies, said soaring oil prices have given the Angolan government more breathing space, "so it is now trying to probably unload parts of the debt burden before the debt service moratorium ends in 2023 ".
"I am sure the Angolan officials well remember the bitter times when the prices of crude were low, and they had to send more oil shipments to China to compensate for the difference, and they wouldn't want to go back there," he said.
Although the Angolan debt saga can be traced back to China, for every dollar that someone gives there is a hand that takes, Kopinski said.
"And Angola has been happily taking Chinese loans," he said. "To be fair, it has to be viewed against the West's reluctance to finance Angola's reconstruction, but blaming China for the debt largesse is negating the Angolan agency, and you can call the Angolan regime out on many things but submission to international partners, including China, is not one of them."
By repaying the loans before the expiry of the moratorium the government saves on the total interest it pays, said Gerrit van Rooyen, an economist at Oxford Economics Africa.
"Thanks to the rise in the oil price, the government has ample revenues to increase debt repayments - it is commendable," he said.
Angolan President Joao Lourenco is seeking re-election in August, and van Rooyen said lowering the country's debt burden before then would be seen as "some victory for the ruling party".
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 © 2022 South China Morning Post Publishers Ltd. All rights reserved.
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