8.3. The dynamics of China- Angola economic affair in perspective
8.3.1. The Angolan model: Mineral resources for loan repayment
There is no gainsaying that China’s ‘debt trap diplomacy’ has assisted its presupposed hegemony over the African continent and other countries across the globe. Such is mostly done by adopting the well-known Angolan model where natural resources are utilised as collateral for various credit lines and/or loans (Vines & Campos, 2010).
Practically, this is how it is done: Angola factually owes China an estimated US$21.5bn billion and negotiating further US$4.4 billion, with the earlier having cumulated debts over more than 2 decades (Olander, Van Staden & Alves, 2018). With so much oil in Angola, the African country should never be found to be making efforts of trying to sell its oil in the international market to attain proceeds that shall service the loans from China. This practice is not allowed under the Chinese debt-trap diplomacy to sell oil in the open market. Instead, the oil itself should be utilised for the loan reimbursement.
This implies that Angola is not liquidated as the country’s biggest earner (oil) is debt trapped by the Asian giant. As the African country returns to Beijing to borrow more loans; such is alternatively digging a more sizeable hole for the debt trap process to continue unabated (Olander et al., 2018).
In Angola’s attempts at attracting foreign investors to assist it in the diversification of its oil-sustained economy; China still takes a leading trading role as Angola is still heavily indebted to it and it becomes an almost impossible task to drive some difficult trade bargains when debt-trapped. Globally, we have seen the role played by China’s Belt and Road Initiative that motivated the struck some deals that handed Beijing some
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control of key projects in various countries including Port of Sri Lanka and Pakistan, encouraging local complaints about the loss of economic sovereignty to China. This happens when the Angolan debt keeps stacking up with demands for new loans in the projects of economic diversification pushing Luanda into default. Since oil is utilised as the collateral for the Chinese credit, Angola’s current oil production upturn combined with the increased repayment pressure and/or requirements might fasten the shipments into China, which is the principal market for the Angolan crude oil (Obi, 2010).
This has been similar to the debt-ridden Venezuela (another of China’s suppliers) which has contemporarily been struggling with meeting its oil-backed loan obligations.
As Joao Laurenco (Angolan President) goes ahead with various reforms that are intended to create a more business-friendly domain and roll back the economic influence of Jose Eduardo Dos Santos (Former Angolan President), his cronies and family, it is still not clearly understood on whether the wealthy west investors have been persuaded enough to collaborate with a nation-state that was long a victim of mismanagement and corruption. China, in the interim, quickly moved to wave that it desires to upgrade its partnership with Angola (Alaco, 2018).
This partnership is the by-product of ties long based on loans for infrastructure construction mostly given to Chinese companies. Wang Yi (Chinese Foreign Minister) categorically indicated that China was in full support of Lourenco’s strategy of economic diversification including that “Chinese companies have the capabilities and conditions to supply equipment and technologies to re-launch industry in Angola”
(Alaco, 2018: online). In response to this, Laurenco then called on the Asian giant to start investing more in tourism, animal husbandry, mining and agriculture. He also indicated the fastening of the improvement phase to the country’s business and investment environment, to warrant what he understood as the legitimate interests and rights of the Chinese MNCs and SOEs. Based on this current model of engagement, and if, kept the same, most of the Chinese investment loans would then be recompensated in oil (Alaco, 2018: online).
Furthermore, as President Lourenco has turned his entire attention on the economic diversification, China might clout the mounting Angolan debt for the sealing of even
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bigger stakes in the state-of-the-art projects, as it emerges to have done in South Asia and inflate the obligations of Luanda’s loan repayment. Arguably, all the Chinese loan repayments are supposed to be inter-linked to the oil price during the negotiating period, and so Angola would have to ship more crude oil when the value is depreciating. Repayment is also likely to get harder as Angolan oil production has slumped in the recent period due to the diminishing investment in the offshore fields of the African country; fall in the price of oil turning extraction profitably less (Wekesa 2021: interview).
Some energy companies have been contemplating the various strategies of exit, with their only concerns heightened by the various delays reported in the project approvals and payments within the State Oil Company Sonangol. Based on the International Energy Agency as quoted by Alaco (2018: online), “production is forecast to fall to 1.3m barrels a day in 2023 from a peak of 1.9m barrels a day in 2008, unless new investment is made in oil exploration, with existing fields nearing depletion” in Angola.
President Lourenco has adopted the various measures to restore the confidence within the energy sector that is western oil companies dominated. This was done by invoking the process to restructure Sonangol and firing its Chairperson Isabel Dos Santos (Eldest Daughter to Former President Dos Santos) and more latterly trimming the tax rates on the development of the marginal oil fields to boost investment (Alaco, 2018).
Despite the various reforms by President Lourenco for the dismantling of Dos Santos’
economic legacy, both China and Western investors remain very much cautious. Even with these good reforms on incentivising investment and dealing with corruption, there are still stumbling blocks such as the truanting of correspondent banking interrelations for severe foreign currency shortages and dollar transactions including raised questions on how well this sustained overhaul of the environment of business will be.
Combined with implications that shortly, President Lourenco will most likely rely extensively on China for funding of his plans of the diversification of the economy. This potential risk might deepen the already dependence of Luanda on Beijing and expand what others see as the recolonisation of Africa by China (Maphaka, 2021, interview).
Beijing on the other hand should be worried by the expanding Angolan debt through oil-backed investment loans as the repayment deal. For Beijing, Angola needs to
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remain solvent with an improved outlook due to the oil price rebound and government policies. Otherwise, the Angolan default might easily cut oil supply to the Asian giant- with which China could not do well without, as the downward spiral of Venezuela has already squeezed China’s significant source of crude oil (Alaco, 2018).
Certainly, Angola has lost power over crude oil to trade as more Angolan oil flows to China debt repayment, leaving little revenue for the Angolan industry towards development of social services in the biggest oil producing nation in the continent. The same is a direct follow-up pattern that has been spotted well in Venezuela, Iraq, Russia, Kazakhstan, and is repeated in Angola as it has trapped more of its oil output in pre-funded deals to usher a drop in income due to the 70% fall in the prices of oil in the year 2016. The price slump meant that some of the Western oil companies which managed some of the oil platforms and fields that assisted the African country to export 1.8 million barrels daily were taking more oil in return for their services and investment too (George, 2016). Equally, we have seen globally that oil-rich countries have used it for loan-collaterals, and during the 2008 oil price collapse, the entire collateral process assisted these countries until better times. In the recent past, just over half the African country’s 50-60 monthly cargoes went towards oil companies with just four to five cargoes headed straight to reimburse the pre-funded oil deals, leaving Angola state oil Company Sonangol with two dozens to place on the market and/or to coinage the continuing contracts (George, 2016).
The deal struck with China’s state-run Sinochem Group in December 2015, which embroiled as many as six cargoes monthly that were earmarked for sailing east as part of the repayment initiatives. This has prompted various oil cuts for trade to the wealthy west through their Chevron, Total and BP with more cargoes sailing east while the price falls. Chinese fresh rounds of pre-funding Angola often doubles the cargoes that sail to the east for repayment. On top of this, the continued oil-backed credit lines are predicted to have ballooned to $25 billion. Roderick Bruce (West African Principal Energy Analyst) argues that “the lower the oil price, the cruder oil it costs to service debt” and that this is “an increasing amount of crude that cannot be sold to directly fill government coffers,” (George, 2016: online).
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Dos Santos who was the Angolan president for 36 years since the Angolan independence had requested China in 2015 for a freeze of debt repayment. This happened as the debt-to-GDP ratio hit around 46% when his government was negotiating a new loan with the World Bank. At the same time, spending was already 40% lower than in 2014 and 2013 respectively and did cut across the rubbish collection and water sanitation allowing the spread of diseases in a country ranking 6th from the World Bank’s inequality index. At the time, the Dos Santos government had forecasted a budget deficit of 5.5% of GDP in the year 2016, premised upon the prices of oil that stood at $45 per barrel. But this was also based upon the rating agency Moody’s which placed the African nation-state’s credit rating under extensive review, intimidating a downgrade further into junk territory. The oil woes of Angola will never be unique: Iraq had also constructed debts of above $2 billion to oil companies after encountering problems with budget needs; Venezuela also has billion-dollar oil-backed loans from China whilst Kazakhstan and Russia borrowed extensively from Glencore and Vitol oil traders. With only a little portion of the leverage assets, there is a tiny room for manoeuvre. “Probably, there is no way out of this dilemma for many countries, and that they should have to live with less oil to sell” (George, 2016: online).