Chinese commodity-backed loans crippling Africa and Latin America -report

LONDON, Feb 27 (Reuters) - Latin American and sub-Saharan African countries have taken out at least $152 billion in oil-, mineral- and metal-backed loans from China since 2004, easy money that has contributed to crippling debt levels, an NGO report said on Thursday.

The Natural Resource Governance Institute (NRGI) calculated that, including loans from other countries such as Russia and global commodity traders, the total amounted to $164 billion. Two Chinese state banks, China Development Bank and Eximbank, alone accounted for 77% of the loans, NRGI said in its report.

Some analysts have raised alarm bells in recent years over debt levels in emerging markets, which have more than doubled to $72 trillion over the past decade, while the International Monetary Fund (IMF) says the number of countries in or at risk of debt distress has risen steadily.

NRGI said such loans appealed to developing countries that have limited access to global capital markets. However, the advantages, such as cheaper terms, were undermined by weak governance and opaque conditions as there had been little competition between lenders.

“While these loans have often provided much-needed infrastructure, such as roads and hydro-dams, in many cases they have led to crippling levels of debt and the risk of losing collateral that is itself worth more than the value of the loan,” wrote co-author David Mihalyi, a senior economic analyst with NRGI.

These loans make up significant portions of countries’ GDP. Where they account for more than 10 percent of GDP, NRGI found that they were cited by the IMF as key contributors to debt sustainability problems.

For instance, the oil price crash in 2014 hit the Republic of Congo and Chad hard and they were unable to allocate physical cargoes of crude as debt repayments while also maintaining sufficient income.

In order to secure an IMF bail-out, Chad had to restructure its oil-backed loan with Glencore with the help of banks, which it succeeded in doing in 2018.

Congo was also granted a conditional rescue plan last year worth $2 billion from the IMF and other lenders, but these payments have been frozen since government discussions with Glencore and Trafigura hit a wall.

Another major risk was that the funds were often made available outside of the government’s regular budget process, NRGI’s report said.

“Off budget spending is not subject to the normal budgetary safeguards such as national investment planning, national debt strategy, parliamentary scrutiny, national procurement procedures and the auditing of execution by the appropriate government agencies.”

For instance, fewer than half of national oil companies publish audited financial accounts, and only a few of those report on how they spend their proceeds in any detail, NRGI said?

Among the 52 loans examined by NRGI, the interest rate could only be identified in 19.

In Ghana, the IMF has warned that a planned increase in bauxite output to meet repayments for a $2 billion loan from the Chinese state firm Sinohydro may not be possible.

Elsewhere, Guinea has signed for a $20 billion loan worth 200% of its GDP, also backed by bauxite production - although a significant portion has not yet been drawn down, NRGI said.

NRGI noted that, while bauxite output had started in Guinea at the concessions to the Chinese that are part of the deal, there was little public information on how repayments would be made.

Along with the IMF, the ratings agency Moody’s has also raised concerns about lending in sub-Saharan Africa by non-members of the Paris Club such as China.

“The lending terms ... can be less transparent and predictable. They can also be complex when debt is collateralized ... as in the case of commodity-backed facilities in resource-dependent countries,” Moody’s said in a recent note.

“In the absence of conditionality on structural reforms, the economic returns of nontraditional bilateral lending may be lower than if accompanied by policy reforms.”

Reporting by Julia Payne, additional reporting by Karin Strohecker; Editing by Kevin Liffey