February 21, 2020 / 8:31 AM / a month ago

Solomon Islands seeks $100 billion loan from Chinese interests-documents

SYDNEY (Reuters) - The government of the Solomon Islands is seeking a $100 billion loan from Chinese interests in negotiations that started shortly after the small South Pacific archipelago switched diplomatic ties from Taiwan to Beijing last year.

FILE PHOTO: National flags of Solomon Islands and China flutter at the Tiananmen Square in Beijing, China October 7, 2019. REUTERS/Stringer/File Photo

Details of the proposal, reviewed by Reuters, have sparked concern over whether the small economy can handle a loan that represents more than 66 times its annual economic output.

The loan has been formally “offered by confidential donors” through broker Terry Wong, documents from Solomons’ finance department show. The broker, with a Beijing address, would receive a proposed 11% fee if the $100 billion loan is secured.

A person who answered calls to the broker did not comment.

Solomons’ Minister for Finance and Treasury Harry Kuma, who is leading the negotiations, told Reuters he would provide further detail about the talks next week.

The office of the Prime Minister, Manasseh Sogavare, said an official statement was pending.

A senior member of the Solomons government with knowledge of the proposal confirmed the veracity of the documents. He declined to be identified because he is not authorized to speak on behalf of the government.

This person said the discussions were exploratory and there was no certainty a deal would be reached. The proposal was from “private Chinese interests” and did not involve the Chinese government.

China’s Foreign Ministry did not immediately respond to a faxed request for comment.

The correspondence between the broker and the Solomons government dates back to November last year, shortly after the South Pacific nation severed ties with its long-term partner Taiwan in favor of Beijing, which drew a sharp rebuke from the United States.

The diplomatic switch was a prize for China in its bid to peel away allies from Taiwan, which it considers sacred territory with no right to state-to-state ties.

The archipelago, where fierce fighting occurred during World War Two, is also a highly strategic location in the South Pacific.

Opposition lawmaker Peter Kenilorea, who was critical of the diplomatic shift to Beijing, said he was vehemently opposed to the loan proposal.

“It’s extraordinarily stupid,” he told Reuters on Friday, citing an unsustainable debt load.

Documents from the Solomons finance ministry include investment plans designed to recoup the brokerage fee and service an interest rate on the $100 billion loan that it said would be around 0.05% a year.

“Surplus revenue generated from the investment plan will be injected into the Solomon Islands national budget annually,” the proposal says.

The International Monetary Fund (IMF) said in a February report that Solomons’s debt was low, but it was at risk of financial shocks given it is a small, low-income economy heavily reliant on a logging industry that is in decline due to depleted resources.

The Solomons has a population of around 650,000, and a GDP of $1.47 billion, budget documents show.

(GRAPHIC: Tug of war in the Pacific - here)

Reporting by Jonathan Barrett in Sydney

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