Decades of Debt: Angola & China Pt.1

Over the years, the Chinese presence in Angola has increased; it is noticeable when taking flights to the capital Luanda, where you will see internationals mainly Chinese on business class flights. Or in the market, where you see them set up for trade every morning alongside the locals. Whatever is happening back home, no-one can deny that the Chinese are making an economic impact in Angola, but some may wonder what the reason for this is.

Well starting with some personal background, my father's company is based out in Luanda and often he complains of Chinese competitors in the Agriculture and Infrastructural field. Not just based on this, my sisters travelled to Angola twice last year and came back with stories of Chinese people speaking the native language out there and trying to sell them goods at the market. Chinese people have also infiltrated the construction trade, with many locals calling on them to carry out work on their private properties because they are readily available skilled labour. Just like the Angolans that live day to day, it's safe to say that the Chinese in Angola do not want to miss out on the hustle and bustle of the country. But why is the Chinese state really interested in Angola?...This post is to give you a bit of background around the trading relationship between the two countries.

Some of you may not know, that China is Angola's biggest trading partner. The country is Beijing's second biggest trading partner after Russia for crude oil. But unlike Russia, Angola is debt-ridden to China; the slowing settlement of their debt can lead to China taking too much of a hold over Africa's third largest economy. Angola being an oil-dependent economy means that the current government is seeking foreign investors to diversify to boost other micro-industries in the country (Alaco, 2018). In turn, this increase in Foreign Direct Investment [FDI] should increase the Angola's GDP and help it to climb up the continental economic ladder. China have been issuing loans to Angola to fund things like construction, mining, building roads, agriculture and tourism since the end of the civil war in 2002. The "investment repayments would probably be paid in oil" (Alaco, 2018) and not only that but of course the Angolan government will aim to ensure that the business environment is growing at a fast enough rate to accommodate the interests of Chinese corporations who invest in it.

However, since 2018, Angola has found itself following the early footsteps of Venezuela, a country that has is 7 years into a crippling economic crisis yet has the world's biggest crude oil reserve and has always cemented its power in being able to maintain state control of it. Venezuela has now privatised its oil reserves and the national company Petróleos de Venezuela no longer controls it. Instead, private foreign companies are "pumping crude oil and arranging exports, even hiring security teams to protect their operations" (Kurmanaev and Krauss, 2020). The prospect of this is worrying for Angola and I assume that other western governments are probably sitting back, reluctant to offer Angola such investment terms because they fear this too. Coupled with the fact that Angola is infamous for a corrupt previous government with Isabel dos Santos defrauding the country out of $2bn, oil being one of her main vices. Western governments are probably treading carefully around going into business with Angola as it may affect their reputation negatively.

China has loaned Angola more than $60bn since the two countries established diplomatic relations in 1983. At the end of 2017, Angola’s debt to China amounted to $21.5bn — about half its external debt — and this year the burden is likely to grow with Luanda negotiating a further $4.4bn in Chinese loans. Chinese loan repayments are believed to be linked to the price of oil at the time they are negotiated, so Angola has to ship more crude when its value depreciates. Repayment is getting harder and harder as Angolan production has slumped in recent years because of diminishing investment in the country’s ageing offshore fields, the fall in the price of oil making extraction less profitable. This means that Angola still must extract it despite it costing more to do against each unit of oil that they actually produce - the pressure of keeping China satisfied with enough oil to expand their own markets while simultaneously becoming shareholders in some of Angola's biggest development operations.

Therefore, Angola generates very little revenue from its natural reserves because much of its oil is "never sold on the open market and is instead used to pay off all the Chinese debt, prompting a severe liquidity crisis" (Olander, van Staden and Dias Alves, 2018). There just isn’t enough cash circulating in the economy, which also explains why Angola struggles with some of the highest inflation rates in the world and in turn they result to borrowing more from Beijing. At the start of the last decade, production and exports to China were paying off "45 percent of Angolan oil goes to China" (Macau Hub, 2010) and Angola's economy was steadily rising with its foreign reserves reported to be increasing. However, the oil market has hit a plateau over the years because as Angola tries to rebuild its economy, the government has realised that job roles and development projects need to be handled by China on a larger scale as Angola simply does not have the resources to ensure the vision of a thriving agriculture and tourism industry i.e. enough skilled labour and materials for building. So, to leverage the aid from China in the areas that they are lacking in, they offer more oil up to China.

Not only this, but the countries nationalised oil company Sonangol, was involved in the recently uncovered scandals of Isabel dos Santos, former presidents daughter. Angola is "still reeling from ex-president Dos Santos's 38-year rule, during which key positions were awarded to his cronies and wealth amassed by a select few" (News24, 2020). With the company practically pumping money into Isabel's pocket by loaning her millions of dollars, for which she wrote off as part owner of the company. The company's oil reserves have always been offered up to the highest bidder, or the most powerful.

But some may argue that this is the reason why current president has resulted to China as an answer to the economic crisis left by previous rulers. Joao Lourenco has "vowed to crack down on corruption and has launched a large-scale purge of the Dos Santos administration" (News24, 2020) and his new method seems to be to leverage its way through China's pockets with oil. Although this strategy can be detrimental to national wealth as Angola simply does not export enough oil on the domestic market to see real benefits from it. Also, as we touched upon in the beginning of this post; Chinese people are taking money out of the Angolan economy as they are being hired for jobs by individuals of the public and large corporations. The problem lies with where the Chinese are then pumping this money into, is it back into the Angolan economy? Or can we assume that the Chinese people are nurturing their own communities be it back home or in Angola, where African people are less likely to profit from. In order for Angola to truly maximise their wealth, they would have to be able to maintain procedures with development projects in the aforementioned industries, while simultaneously eliminating China as a debtor. At the moment, I cannot see how this is feasible in the foreseeable future.

Look out for part 2 of this post where we will look into key events that have taken place in Angola and China's ongoing trade relationship. This was simply to paint a picture of the current position Angola is with China - but it seems that at the moment the Chinese have it eating out of their hands. It would be great to know your views on this, please do not hesitate to like, comment or share this post and join the discussion.

Thanks for reading.