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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)

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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