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Chinese Bank Mulls Buying African Infrastructure Debts

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  • Chinese Bank Mulls Buying African Infrastructure Debts

African governments could get access to more Chinese debt if a plan by a leading Chinese banking conglomerate to buy African infrastructure debts from the government succeeds.

The plan to buy the debts would start next year, repackage them into securities and then sell them to investors.

However, the new proposal could prove to be a poisoned chalice as it could mire African countries in more debt.

However, for Chinese financiers, developers and multilateral development financial institutions, this will offer further opportunities to make money from the continent.

The plan will see Hong Kong mortgage insurer Hong Kong Mortgage Corporation (HKMC) buy a diverse basket of infrastructure loans next year and explore the idea of “securitising” or repackaging them into securities for sale to investors, allowing it extra liquidity that it can loan out to finance more infrastructure projects.

“This initiative we believe will help ‘recycle’ commercial banks’ capital to be redeployed into other greenfield infrastructure projects, besides enabling wider capital markets participation in infrastructure development under the Road and Belt initiative,” said HKMC Greater China chief executive Helen Wong.

The thinking behind this, according to the country’s Monetary Authority, is to use Hong Kong’s recently set up Infrastructure Financing Facilitation Office to enhance the capacity of the investing and recipient countries in infrastructure financing and facilitate infrastructure investment and financing flows.

“I am happy that the HKMC is now considering a new line of business of buying infrastructure loans for the purpose of securitisation. This is because new capital standards for banks do not make it attractive for them to hold on to these loans on a long-term basis, even though the projects at the brownfield stage are operating smoothly.

“I can see a good opportunity for banks to offload their loans to these long-term investors,” Norman Chan, chief executive of the Hong Kong Monetary Authority, said last week, adding that there are currently many investors, including insurance and pension funds, looking for less risky investments that can produce steady long-term cash flows.

The plan, which is still being developed, will see more than 90 firms including project developers or operators, commercial and investment banks, multilateral development financial institutions, asset owners and managers and professional service firms from Hong Kong, mainland China and overseas joining as partners.

Some of these firms already have current projects and infrastructure loans in the region, which puts the region’s debts into the basket set for “securitisation.”

The move will be a boon for infrastructure financiers as it will release illiquid assets back into the market, offering fresh capital injections for newer projects, which could allow for more funding opportunities for regional countries.

Latest data from the China-Africa Research Initiative at Johns Hopkins University shows regional economies owed China and its institutions more than $29.42 billion as at April this year in infrastructure loans, which have been tapped over the past 10 years to build transport, communication, manufacturing and energy sectors.

The data shows that Ethiopia leads the region with a $13.73 billion debt to Beijing, followed by Kenya at $9.8 billion.

Uganda owes $2.96 billion; Tanzania owes $2.34 billion. Rwanda, Burundi and South Sudan owe $289 million, $99 million and $182 million respectively.

This new development comes at a time when China’s main project insurer, China Export and Credit Insurance Corporation, known as Sinosure, cast doubt on the viability of some infrastructure projects. The firm has already incurred losses of more than $1 billion on the Ethiopian-Djibouti railway alone.

Last week, Wang Wen, the chief economist for Sinosure, said that the planning behind many of China’s major infrastructure projects abroad has been “downright inadequate,” leading to huge financial losses.

“Chinese developers and financiers of projects in developing nations need to step up their risk management to avoid disaster. We can see the mistakes of the Addis-Djibouti Railway line, which has cost Sinosure a $1 billion loss,” said Mr Wang.

The $4 billion Addis Ababa-Djibouti freight railway, which was inaugurated at the start of this year, saw Ethiopia seek to restructure its debt in September by extending the repayment terms, following its underuse as a result of power shortages.

“Ethiopia’s planning capabilities are lacking, but even with the help of Sinosure and the lending Chinese bank, it was still insufficient,” Mr Wang said at a Belt-and-Road infrastructure financing forum in Hong Kong.

The plan to securitise and sell the Chinese debt to investors comes at a time when many African nations are seeking to either restructure their debts with Beijing or get friendlier terms, with more grant packages as they face a rising debt dilemma.

In September, Addis announced that China had agreed to restructure some of its loans, including a loan for a $4 billion railway linking its capital Addis to neighbouring Djibouti.

Ethiopian Prime Minister Abiy Ahmed said their loans will be restructured, with a further 20-year extension, which will see its annual repayments reduced to an affordable level.

“In our conversation with our Chinese partners, we had the opportunity to enact limited restructuring of some of our loans. In particular, the loan for the Addis Ababa-Djibouti railway, which was meant to be paid over 10 years, has now been extended to 30 years. Its maturity period has also been extended,” PM Abiy said.

Nairobi, which has been ramping up the freight numbers for its SGR line between Nairobi and Mombasa, was also on record as asking for a 50 per cent grant on its $3.8 billion third phase of railway construction between Naivasha and Kisumu.

The first phase of the project, which cost $3.2 billion, was financed by the China Exim Bank, with a concessional loan of $1.6 billion with a 20-year life, a grace period of seven years and an annual interest rate of two per cent.

The concessional loan, on the other hand, was for 10 years, with a grace period of five years; an insurance cover of 6.93 per cent and an interest of a six-month average of the London Inter-bank Offered Rate plus 3.86 per cent.

This loan also had a grant element of 35 per cent and the first repayments are due next year. If the railway doesn’t break even by then, Kenyan taxpayers will have to foot that bill, realising Sinosure’s fears, given that it offered insurance for this loan.

In July, Kenya’s Transport Cabinet Secretary James Macharia told a parliamentary committee that the SGR operator had made a loss of $110 million in its first year of operations.

“On average, the line made a monthly loss of $7.5 million in the 2017/2018 financial year largely as a result of low cargo business. However, we now project that it will turn around and make a profit of $50 million by June next year, averaging $4.2 million profit monthly as we ramp up cargo volumes,” Mr Macharia said.

However, according to the Kenya Ports Authority (KPA), the SGR cargo haulage has raked in more than $16.2 million in the past nine months, at $1.8 million a month, as the train’s daily tonnage capacity moved above 800 containers, out of the 1,700 containers that arrive at the Port of Mombasa.

“Since the start of SGR cargo freight operations in January, a total of $16.2 million has been billed, collected and remitted to the SGR escrow account, which is under the custody of Kenya Railways,” KPA managing director Daniel Manduku said. (The East African)

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Oil Prices Slip as Japan’s Rising Inflation Signals Rate Hikes

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Crude oil fell in early trading on Friday as concerns over sustained high interest rates in both Asia and the United States weighed on the outlook.

This trend is attributed to Japan’s increasing inflation, which is prompting expectations of imminent rate hikes by its central bank.

Brent crude edged declined by 11 cents to settle at $85.60 per barrel while the U.S. crude oil declined by 9 cents to $81.20 per barrel.

Recent data revealed that Japan’s core consumer prices rose by 2.5% in May compared to the same month last year. This increase marks a growth from the previous month, suggesting that the Bank of Japan is likely to raise interest rates in the upcoming months to curb inflation.

In the United States, data released on Thursday showed a decrease in the number of new unemployment claims for the week ending June 14, indicating continued strength in the job market.

This persistent robustness in employment raises the likelihood that the U.S. Federal Reserve will maintain higher interest rates for a longer period.

Higher interest rates typically have a dampening effect on economic activity, which can subsequently reduce oil demand.

The prospect of prolonged elevated interest rates in two major economies has therefore put downward pressure on crude oil prices.

Despite the downward trend, oil prices received some support from the latest figures from the Energy Information Administration (EIA).

The data showed a drawdown in U.S. crude inventories by 2.5 million barrels in the week ending June 14, bringing the total to 457.1 million barrels. This exceeded analysts’ expectations, who had predicted a 2.2 million-barrel reduction.

Also, gasoline inventories fell by 2.3 million barrels to 231.2 million barrels, contrary to forecasts that anticipated a 600,000-barrel increase.

“Gasoline finally came to life and posted its first strong report of the summer driving season,” remarked Bob Yawger, director of energy futures at Mizuho in New York, highlighting the surprising uptick in gasoline demand.

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Nembe Creek Oil Field Halted After Leak, Impacting 150,000 bpd

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Nigeria’s oil output has taken a significant hit following the shutdown of the Nembe Creek oil field due to a major oil leak.

The Nembe Creek oil field, responsible for producing approximately 150,000 barrels of crude oil per day (bpd), was forced to cease operations on June 17, 2024.

The leak occurred on the Nembe Creek Trunk Line (NCTL), a critical pipeline that transports oil from the Nembe Creek oil field to the Bonny Oil Export Terminal.

The operator of the pipeline, Aiteo Eastern Exploration and Production Company, confirmed the leak and the subsequent shutdown in a statement released yesterday.

Aiteo reported that the leak was discovered during routine operations in the Nembe area of Bayelsa State, located in Nigeria’s oil-rich Delta region.

This region is notorious for environmental degradation due to decades of oil spills, which have severely impacted local agriculture and fishing industries.

Following the discovery of the leak, Aiteo activated its Oil Spill and Emergency Response Team and shut down all production from Oil Mining Lease (OML) 29 as a precautionary measure to prevent further environmental damage.

“While we regret the production losses and the potential environmental impact, our current priority is to expedite an efficient spill management process in line with regulatory standards and collaborate with all stakeholders to restore production and mitigate associated risks,” said Victor Okronkwo, Managing Director of Aiteo Eastern E&P.

The exact cause of the leak remains unknown. Aiteo emphasized that the shutdown was a precautionary step to contain the spill and minimize environmental harm.

The company has notified its joint venture partners and relevant regulatory bodies, including the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the National Oil Spill Detection and Response Agency (NOSDRA), about the incident.

This development comes as a setback for Nigeria, which holds Africa’s largest natural gas reserves and is a major oil producer.

The country’s oil sector has faced numerous challenges, including aging infrastructure, theft, and environmental issues, which have hindered its ability to maximize production and exports.

The Nembe Creek shutdown also highlights ongoing concerns about the safety and reliability of Nigeria’s oil infrastructure. The NCTL has been a frequent target of oil theft and sabotage, exacerbating the challenges of maintaining a steady oil output.

Energy analysts believe that the latest incident could impact Nigeria’s ability to meet its export commitments and exacerbate the country’s economic challenges.

The Nigerian government, under President Bola Tinubu, has been making efforts to attract investment into the energy sector to boost production and address infrastructure deficits.

“The government will hope this offers confidence not only in the quality of the Nigerian resource base, but also in the government’s pledge to improve ease of doing business,” said Clementine Wallop, director of sub-Saharan Africa at political risk consultancy Horizon Engage.

As Nigeria works to address the immediate spill and restore production, the broader implications for the country’s oil sector and its environmental impact remain to be seen.

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Brent Crude Nears Seven-Week Highs as Market Eyes US Inventory Report

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Brent oil, the international benchmark for Nigerian crude oil, remained steady on Thursday, hovering just below seven-week highs as the escalating conflict in the Middle East raised concerns over potential supply disruptions.

At the same time, the market eagerly awaits U.S. inventory data for further indications of demand trends.

August Brent crude rose 28 cents, or 0.3%, to $85.35 a barrel while the U.S West Texas Intermediate (WTI) oil gained 13 cents, or 0.2%, to $81.70 a barrel.

“There was no WTI settlement on Wednesday due to a U.S. public holiday, which kept trading subdued,” noted Ricardo Evangelista, an analyst at ActivTrades.

“However, oil prices are likely to remain supported around current levels due to a growing geopolitical risk premium driven by conflict in the Middle East.”

Israeli forces have intensified their operations in the Gaza Strip, targeting areas in the central region overnight while tanks advanced into Rafah in the south.

The escalating violence has heightened fears of a broader conflict that could impact oil supplies from the region.

“Expectations of an inventory build appear to be overshadowing fears of escalating geopolitical stress for now,” said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Investors are keenly awaiting the release of U.S. inventory data from the Energy Information Administration (EIA) later on Thursday, delayed by a day due to the Juneteenth holiday.

An industry report released on Tuesday by the American Petroleum Institute (API) indicated that U.S. crude stocks rose by 2.264 million barrels in the week ending June 14, while gasoline inventories fell, according to market sources.

The summer season typically sees an uptick in oil demand due to increased refinery runs and weather-related risks.

“Ongoing production cuts by the OPEC+ group, combined with seasonal demand, should tighten oil balances and lead to inventory draws during the summer months,” J.P. Morgan commodities analysts wrote.

Refining margins have also improved, with the ICE gasoil futures premium to Brent crude jumping to $20.63 a barrel on Wednesday, a two-month high.

“Firmer fuel refining margins provide a healthy dose of encouragement for those expecting improvements on the demand side,” commented Tamas Varga, an analyst at PVM.

In other economic news, the Bank of England’s decision to keep its main interest rate unchanged at a 16-year high of 5.25% ahead of the national election on July 4 has been noted by market observers.

Higher interest rates generally increase the cost of borrowing, which can slow economic activity and dampen oil demand.

As the market braces for the upcoming EIA inventory report, analysts and traders are closely watching for any signals that could influence oil prices in the near term.

The delicate balance between geopolitical tensions and supply-demand fundamentals continues to play a critical role in shaping the oil market landscape.

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