Angola, Africa’s second largest oil producer, has seen its interest payments to external creditors, particularly from China, skyrocket as the Chinese debt freeze comes to an end.
According to data released by Banco Nacional de Angola (BNA), Angola’s central bank, interest payments doubled from $775 million in the first quarter of this year to $1.57 billion in the second quarter. This surge in payments is the highest it has been since at least the first quarter of 2012.
Although the increase in interest payments is a cause for concern, Angola did experience some relief in its service trade deficit, which fell to a two-year low of $1.77 billion in the second quarter of this year from $2.34 billion in the first quarter. This decrease in the deficit helped partially offset the higher interest payments.
Angola has become Africa’s largest recipient of financing from China, having acquired 254 loans worth an estimated $42.6 billion from Chinese lenders. In fact, Angola accounted for over a quarter of China’s total lending to African countries between 2000 and 2020, according to data from the Chinese Loans to Africa Database compiled by the Global Development Policy Centre at Boston University.
The economic impact of the coronavirus pandemic further worsened Angola’s debt problems, particularly in early 2020 when global crude oil prices drastically dropped below $30 per barrel. With oil accounting for 90% of Angola’s exports, the country is extremely vulnerable to price fluctuations in the global oil market. As a result, Angola faced significant challenges in managing its debts.
To alleviate some of the financial strain, Angola joined the Debt Service Suspension Initiative launched by the Group of 20 in May 2020. This initiative aimed to provide debt relief for impoverished nations. Angola was among the countries that sought assistance through this program.
Chinese lenders, including China Development Bank and the Industrial and Commercial Bank of China, granted Angola a three-year freeze on debt payments totaling $4.9 billion from June 2020 to May 2023. In addition, Angola received undisclosed debt relief from China Eximbank under the DSSI.
According to Mark Bohlund, a senior credit research analyst at REDD Intelligence, it is likely that the significant increase in interest payments for the second quarter of 2023 reflects the replenishment of an escrow account at CDB. This escrow account was used to make interest payments during the three-year debt moratorium period.
Bohlund mentioned that while Banco Nacional de Angola has not disclosed the balance of the CDB escrow account, estimations suggest that the majority of the $800 million increase in interest payments between the first two quarters of this year can be attributed to replenishing this account to reach $1.5 billion as mandated in the debt moratorium agreement.
“It is still too early to determine how much Angola’s interest payments will rise following the end of the debt moratorium,” Bohlund explained. There are also other factors at play, such as increases in global interest rates, as some of Angola’s external loans have variable rates.
“The anticipated increase in principal payments is likely to be partially offset by new loan disbursements, specifically those from Industrial and Commercial Bank of China for the Caculo-Cabaca hydropower project, which recently began construction on the water reservoir,” stated Bohlund.
According to REDD Intelligence, a provider of intelligence and data on emerging market sovereigns and companies, ICBC currently holds approximately $5 billion in outstanding debt as Angola’s second-largest creditor in the first quarter of this year. These calculations are based on data from BNA and the Ministry of Finance.
Ministry of Finance data indicates that external debt disbursements are projected to reach 985 billion Angolan kwanza $1.7 billion in June, largely attributed to a commercial debt disbursement.
Bohlund suggested that these disbursements are likely linked to the Caculo-Cabaca project, although it is also possible that they are connected to the ongoing construction of the Agostinho Neto International Airport, which is also led by a Chinese firm.
“We anticipate that loan disbursements associated with these two projects will drive Angola’s debt owed to Chinese creditors back up towards $20 billion in the second half of this year,” he concluded.
A study conducted earlier this year by the China Africa Research Initiative at Johns Hopkins University revealed that despite paying interest during the suspension period, Angola gained significantly greater breathing room with its three-year grace period and repayment spread over seven years through debt reprofilings than what was originally stipulated under the DSSI.
According to the CARI study, the CDB deal included an oil price contingency that would shorten the suspension period once the oil price exceeded a certain threshold, rumored to be $60 per barrel.
In late 2021, this contingency was activated and Angola began repaying the principal to CDB in early 2022. By that time, the oil price had soared to over $90 per barrel from its initial level of $55 when the debt was restructured.
Aly-Khan Satchu, an expert on sub-Saharan African geoeconomics, emphasized that the recent surge in oil prices towards $100 per barrel is significantly benefitting Angola’s prospects and financial position. He explained how Russia and Saudi Arabia have taken control of the oil price away from the United States and are deliberately driving it up towards $100.
This situation has put Angola in an incredibly advantageous position. Satchu described it as being in “the sweetest of sweet spots.”
Satchu further noted that resuming payments to China has understandably increased Angola’s interest payment burden. He believes that Angola could potentially negotiate a quid pro quo arrangement with China by leveraging the high oil prices. In other words, they could hasten their debt payments while also making progress on their Chinese debt obligations.
Ever since assuming office as President of Angola in 2017, Joao Lourenço has actively pursued economic diversification away from oil and sought to reduce dependence on China.
In an effort to align closer with the United States and Europe, Lourenço has been seeking stronger ties with these regions rather than China. This marks a departure from his predecessor, the late José Eduardo dos Santos, who relied heavily on Chinese investment for economic reconstruction following the end of the lengthy civil war in 2002.
Recent investments from the United States include a substantial $900 million in funding for a solar plant as well as a proposed $250 million to support the Lobito Atlantic Railway Corridor. This railway line aims to connect Lobito Port in Angola with the border of the Democratic Republic of Congo, providing crucial open access transport options.
Despite efforts to diversify its sources of funding, Angola still relies on China to finance major infrastructure projects such as the Caculo-Cabaca hydropower station, which boasts an impressive capacity of 2,172 megawatts and is being constructed by Chinese entities. Additionally, China National Chemical Engineering is spearheading the construction of the Lobito oil refinery along Angola’s Atlantic coast.
