I attended an excellent session over the past week organised by Wilton Park, an executive agency of the UK government linked to the FCDO:
https://www.wiltonpark.org.uk/event/emerging-markets-in-debt-distress-exploring-options-for-debt-restructuring/
The theme was how to bring some solutions to the current mounting problems around Emerging Markets in or around debt distress. It brought together representatives of the official sector, EM countries, academics, and the private sector, including banks, bondholders, restructuring advisers and legal experts/law firms.
Huge thanks herein to the sponsors, RBC Bluebay AM, JPM, White and Case, PGIM and Alvarez and Marsal. It was good to see companies actually willing to put resources into an agenda which was focused on bringing people together and finding solutions. And massive thanks to the
Wilton Park team, FCDO and HMT for making this happen.
Lots of themes came out of the event, there will be an Executive Summary, and detailed ideas/recommendations for action published in due course, but one topic which was skirted around a bit for different reasons was the “panda in the room”, the issue of the large weight now of Chinese debt owed by many EM countries, and the fact that China now outweighs the Paris Club in terms of its creditor position to EM countries.
It was interesting to hear an alternative view from EM participants, many of whose countries have been recipients of this debt. Generally this stood in stark contrast to the now usual China bashing we hear all so often now in the West.
The more nuanced EM debtor view of China debt was that it was not “more expensive” than other bilateral official debt, it came with few strings attached, and was more focused on bringing deliverables quickly to EM countries - roads, railways, airports, energy infrastructure, that was critical in need and brought a quick improvement in people’s daily lives in EM. I heard one view that it also did not move the dial one way or other on corruption - albeit some would dispute that, particularly related to inducements and over inflated project prices.
Notable herein also was the message that after HIPC debt relief many Western bilateral creditors had stepped back (perhaps thinking that they “had done enough” by wiping much of the slate clean when it came to debt owed by LICs) and reduced their aid/credit to EM and, against that backdrop, China filled that void with the OBOR programme. So the message from EM recipients of China financing was a case of where the West is talking a lot, China acted, and some credit/projects are better than no projects. Another angle we heard was that with Chinese credit generally being projects based it was better placed to generate cash flows to repay the credits, whereas Western bilateral and official debt often disappeared in MOF budgets and was just wasted, or hardly touched the sides in terms of the needs. The message was that China debt was timely and relevant - whereas too often Western financing was slow in coming and entangled in bureaucracy.
A further defence of OBOR, at least when it has now come to the need for debt relief, came from both the official multilateral and the academic participants. The line that was China was new to the whole business of debt relief, at least through official channels, was learning and was now actively and positively engaging in the Commom Framework (CF) put forward by the G20 to better coordinate creditor support to countries facing debt distress. See the summary below around DSSI and the CF.
https://www.imf.org/en/Blogs/Articles/2021/12/02/blog120221the-g20-common-framework-for-debt-treatments-must-be-stepped-up
The message from these participants at the Wilton Park event was that China was learning on issues related to debt relief which took time therein, had many different local stakeholders (central bank, MOF, ministry of foreign affairs, state banks, private banks) which took time to coordinate and educate in the process, but that China was beginning to now step up to the challenge in the CF. The point was made that China is now the largest creditor in many of these countries, larger than the Paris Club, and is expected by the West, at least, to take the strain in terms of offering debt relief, but that Beijing perhaps feels that it deserves more input in the decision making, not just being dictated by the Paris Club, the IMF and the multilaterals and especially when it comes to DSAs. As the largest creditor, with most skin in the game now, why should it just accept DSAs generated by the IMF? It should help shape and craft these.
The local “voice” of the EM recipients of China credit certainly chimed, but there is no escaping from the fact that China OBOR credits are often just so huge relative to other lending, and even the size of many of these economies, whether they are linked to projects bringing a revenue stream or not, that they inevitably impact on the macro framework, and economy wide debt sustainability. OBOR projects typically import large amounts of capital goods, deteriorating current account balances in the process. Repayment terms are also often short term in nature - take Pakistan, for example, where over the next three years $10bn a year is owed to Chinese creditors, putting a weight of pressure on its balance of payments flows. And also in many cases a condition of OBOR credits is preferential trade access for Chinese companies. In the case of Pakistan that caused disastrous consequences for some industries, such as the shoe industry that has been decimated by cheap Chinese competition. So Chinese OBOR credits can seriously deteriorate a country’s BOP position, thru higher capital product imports, short maturity structure of these debts, and then by damaging domestic industries and the ability of a country to generate export revenues to pay debt service on these credits and more broadly. We can debate whether China debt is cheaper, easier to access (fewer conditions), and more useful in terms of being project based, but there is little doubt I think that it has created a negative macro spiral which is now reflected in many of the recipient countries being in debt distress. Perhaps China, through its OBOR, failed to adequately assess the macro consequences of its lending, and failed to attach sufficient broader policy reform conditionality to its lending. Hopefully going forward this will change - notable here now that much new UAE/Saudi lending to developing countries is including now reform conditionality, see Saudi/UAE lending to Turkey, Egypt and Pakistan.
One consequence of the current EM debt crisis, calls for China to be generous in debt relief, is the assumption that as with Western lending post HIPC, China will also reduce its lending to EM. This already seems to be occurring, perhaps also as a reflection also of China’s economic problems back home. A realisation is also perhaps dawning that in lending to low income countries, the payment track record is chequered: China might not get paid back.
Some Western participants argued that in its focus on supporting Ukraine in its defence against Russian invasion, the West neglected the Global South. Herein, the West cannot complain now about the Global South failing to support the West’s position when it has failed to counter China’s OBOR programme. And if the West is going to win back hearts and minds in the Global
South, it has to put money back on the table, it has to compete with the OBOR programme. Perhaps herein we saw the start of that at the recent G20 in India, with G7 compromising on a range of issues related to MDB financing, debt relief and climate change, plus also a new plan to open up rival trade corridors to the OBOR. One participant argued that LICs in debt distress might be more willing to push back on China, pushing for greater relief, if they trusted that more Western/official credits were likely to be on the table. Their LIC counterparts preferred to argue why would they go out of their way to annoy China, which has put credit on the table, when the West’s track record of support for the Global South is so mixed - fair weather friends. Rather better to access support from wherever it is forthomcing, and the ultimately aim should be to maximise cheap financing for the Global South to deliver on development needs. Needs must.