difficulties for a host of sub-Saharan African countries that have borrowed substantially from China in recent years to fund major infrastructure projects, compounding pressures from a slowdown in the continent’s economic growth and falling commodity prices.

Zambia became the first country on the continent to formally default on its debt in November 2020, opting out of a $42.5 million eurobond repayment.

As Africa’s second-largest copper producer, falling copper prices in recent years rendered its $11 billion debt pile increasingly difficult to manage, but concerns also emerged from eurobond investors regarding the transparency of its Chinese loan payments.

What we learned from Zambia
“The popularity of Chinese creditors has created a more diverse creditor base than the historical primarily Paris Club bilateral lenders, which complicates the resolution of repayment conflicts,” Verisk Maplecroft Research Associate Aleix Montana said in a recent report.

Montana said the Zambia case indicates that beyond just the size of debt, the composition of creditors also plays a role in determining debt risk. Transparency concerns mean Western bondholders are more likely to reject potential debt relief packages in countries borrowing from China, due to fears that debt relief will be used to repay Chinese loans.

Resource-backed loans are often attractive to nations with rich natural resources, a need to finance infrastructure projects and limited access to capital markets. In some of China’s financing arrangements, commodities are used as a means of repayment or collateral, Montana highlighted. Loans are often predicated on future production of resources like cocoa, tobacco, oil or copper.

“Repayment deals based on the future value rather than on the quantity of a commodity are especially risky for the borrower, since a decrease in commodity prices in the global market would require an artificial increase in its production to cover the debt obligations,” Montana said.

Zambia has now applied for debt treatment under the G-20 (Group of Twenty) common framework, which aims to offer poorer nations a transparent level playing field through which to restructure or reduce unsustainable debt obligations.

“Zambia is committed to transparency and equal treatment of all creditors in the restructuring process, and our application to benefit from the G20 Common Framework will hopefully reassure all creditors of our commitment to such treatment,” Finance Minister Bwalya Ng’andu said in a recent statement.

Oil producers and ‘resource-backed’ loans
Montana expressed concern about high debt levels in oil exporting countries such as Angola and the Republic of Congo, both of which saw their national currencies devalued in recent years by the broad decline in oil prices.

This makes foreign currency-denominated repayments relatively more expensive, while the use of reserve-based lending also exacerbates the countries’ risk of debt distress, Montana suggested.

The UN Economic Commission for Africa (UNECA) has also highlighted both Angola and the Republic of Congo as being particularly at risk.

“Apart from being two of the countries with the highest risk in public debt and economic growth in our indices, they are two of the countries that have borrowed more heavily from China,” Montana said.