China’s Belt and Road Initiative (BRI) – also known as One Belt and One Road – was inaugurated to considerable fanfare in 2013 as the brainchild of president Xi Jinping, but it was not without its detractors.
A notable complaint was the fact that many countries lining up to borrow from China to undertake BRI projects were already considered higher default risks, scoring less than 50 out of 100 in Euromoney’s country risk survey, with sub-investment grade (junk status) credit ratings.
The world’s biggest development strategy also delivered some unintended consequences, summed-up by Chan Kung and Yu (Tony) Pan writing in The Diplomat.
First, they say, it has led to unbalanced resource investment between the Silk Road Economic Belt (the ‘Belt’) and the Maritime Silk Road (the ‘Road’). Second, its implementation overemphasizes “infrastructure connectivity”.
This only fuels suspicions swirling around China’s commitment and ulterior motives that Euromoney has previously raised, and it poses “huge challenges to the development prospects of the entire project”, the authors suggest.
Too much debt
Non-performing BRI assets have already exceeded $100 billion, or almost a quarter of an already colossal – and growing – amount of project lending. The coronavirus economic downturn has only shone the spotlight more intently on these borrowings as crisis-hit countries line up seeking debt relief.
The latest Euromoney Belt & Road Index (EBRI) results indirectly highlight this in terms of countries moving up and down the rankings.
The EBRI grades investor climates for 68 participating countries across five categories, or tiers, and in Q1 2020 there are some eye-catching changes caused by the sudden alteration in country risk environment and the hit to GDP.
On a regional basis, index values are downgraded for Asia, Central and Eastern Europe, and the Middle East, but less so for Africa, which has not been as badly affected by the coronavirus pandemic, to date.
Comparing regional average GDP growth forecasts for 2020, the IMF’s latest World Economic Outlook highlights this to an extent.
Real GDP in emerging and developing Europe is seen contracting by 5.2%, Middle East and Central Asia by 2.8%, but sub-Saharan Africa by only 1.6%. Emerging and developing Asia will continue to grow, by 1%, the IMF suggests, but this is down from 5.5% in 2019, a higher starting point.
Several countries struggling with the pandemic in terms of economic lockdowns and weakened exports, and notably the negative oil shock in the case of net oil exporters, are experiencing considerable falls in their index values.
Iran, for example, has fallen precipitously from tier three to tier five, due to four main factors: the oil price fall, the pandemic, geopolitics, and a parlous pre-existing macro-fiscal situation due to sanctions.
Bangladesh and Moldova, which were both tier-one countries in Q4 2019, alongside Ethiopia, Bhutan and Laos, have both fallen to tier two in Q1 2020.
A few countries, such as Nepal, the Maldives, Turkmenistan, Montenegro and Belarus (its economy kept open) have higher index values. However, Estonia, Israel, Albania, Bulgaria and Mongolia are down from tier two to tier three, and Croatia, Afghanistan, Malaysia and Lebanon from tier three to tier four.
These movements will likely play a role influencing China’s strategy, as far as the BRI is concerned, believes Joy Rankothge, of Country Acuity Advisors.
“China may reprioritize certain aspects of the BRI in the wake of its weaker GDP print and the Covid-19 backlash internally and externally,” he says.
“There will be calls for debt forgiveness or a debt moratorium among participating countries, but with China’s not very receptive attitude to debt forgiveness, it may make some BRI recipients pause rather than take on more debt.”
Some of the terms attached to BRI projects seem to be less favourable compared with loans from the World Bank, Asian Development Bank and other multilateral and bilateral loans, which again may act as a deterrent.
From China’s perspective, Rankothge says: “The rising sovereign and projects risks on its BRI portfolio will raise credit risk concerns for authorities in China. This is especially true for frontier markets, which have limited buffers to manage shocks.”
However, China will not abandon the BRI. It will just mean reprioritizing certain countries and projects to achieve near-term economic and strategic goals that are balanced with credit risks.
Even in Africa, where China already holds around $145 billion of government debt, there may be an incentive to become more engaged in bilateral negotiations, given the potential for securing resources, strategic military footholds and concessions for Chinese firms.
The BRI will also become more focused on expanding China’s supply chains and digital initiatives, focusing capital on investment opportunities that fit its strategic goals.