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Angola is using an unusual deal with China to relieve a debt crunch in Africa’s second-biggest oil producer by unlocking cash from a Chinese-controlled account to pay interest on a crucial loan, its finance minister said.
Vera Daves de Sousa told the Financial Times the southern African nation had agreed with the China Development Bank, the country’s largest single creditor, to release cash held as collateral for a multibillion-dollar loan.
Her comments on the deal offer a rare window into behind-the-scenes efforts by Chinese banks to provide payment support short of outright debt relief to poor countries that are struggling to pay them back.
China has in recent years provided other forms of support, from currency swap lines to loans, to emerging market borrowers from Argentina to Pakistan.
Chinese creditors had granted Angola a three-year moratorium on its debt payments after the coronavirus pandemic. But the resumption of those payments in 2023 exacerbated a sharp economic downturn in Angola’s economy and hit its currency, the kwanza. Angola had been required to continue other payments such as on US dollar bonds throughout the pandemic.
Angola owes about $17bn to China — just over one-third of its total debt — mostly in the form of loans backed by oil. The nation is Beijing’s biggest borrower on the continent.
State-owned CDB’s lending required Angola to top up cash collateral in a special escrow account as security, to a minimum amount of $1.5bn. Daves de Sousa said Angola had been required to pay in extra money when the oil price was more than $60 a barrel.
The new deal “will allow us to release the funds [for interest payments] . . . $150mn to $200mn will be available monthly”, she said.
The arrangement avoids a broader debt restructuring. “We understand that it is not restructuring, because we didn’t ask for a change of maturities and we didn’t ask for a change of payments,” Daves de Sousa said. On the contrary, she said, in order to keep servicing the debt without defaulting, “we are asking to pay this debt quicker”.
Asked about the arrangement, China’s foreign ministry said Chinese financial institutions had made “significant contributions to the development and revitalisation of Angola and the improvement of people’s livelihoods”.
“Recently, Chinese financial institutions have had friendly and in-depth communications with Angola regarding the loan issues between the two sides, reaching a consensus that satisfies both parties,” the ministry said, without giving details.
Crude oil accounts for almost all Angola’s export earnings, but production fell from 1.5mn barrels a day in 2018 to just over 1.1mn b/d last year, straining the country’s finances. President João Lourenço’s government quit the Opec cartel last year after disagreements over quotas limiting output.
Cash escrow accounts have become “a particularly important safeguard in China’s bilateral lending portfolio”, AidData, a research lab on international development at William & Mary college in the US, said last year.
Although international markets have reopened to many African borrowers as an alternative to Chinese loans after high global interest rates kept them away for several years, Daves de Sousa said Angola was yet to decide whether to issue a US dollar bond in 2024.
Thys Louw, an emerging market debt portfolio manager at asset manager Ninety One, said while there was “some liquidity relief” for Angola from the escrow release, “they do need alternative sources of financing”.
Because Angola was not seeking more IMF loans and could not rely on its own relatively small local debt market, this pointed to an international bond, Louw said. “The problem will be that they will have to pay quite a high price.”
Yields on Angola’s existing US dollar bonds hit 14 per cent last year. While they have since fallen, they remain in the double digits.
Angola’s efforts to diversify its exports away from crude towards sectors such as agriculture and tourism were “a work in progress”, Daves de Sousa said. “We still have high exposure to the oil sector, oil production and the oil price . . . [but] looking at GDP, we are consistently seeing the non-oil sectors growing, and jobs are being created in these sectors.”
Leaving Opec would help Angola’s oil sector grow, the minister added.
“We expect the private sector, the oil majors, to feel they have [more] free space to do the investments they want to do to increase production.”