South Asia’s Bulging Belt Lashes
China’s multi-trillion dollar hard and soft infrastructure investment Belt and Road Initiative (BRI), officially entering its fifth year, was again in the spotlight at the Davos World Economic Forum, where Asian portfolio managers tried to assess stock market recovery prospects in major recipients Pakistan and Sri Lanka in particular. Their MSCI component indices lost 21% and 1% respectively in 2017 as all other Asian exchanges tallied double-digit gains. A recent paper by the Washington-based Center for Strategic and International Studies (CSIS) noted that Beijing loaned Colombo $1.3 billion for a port multilateral development banks refused, and then took an 80 % equity stake in lieu of unpaid interest as part of an $8 billion portfolio in the country ahead of 2019 presidential elections. Pakistan’s traditionally close commercial and diplomatic ties, especially as the US plans to cut back on economic assistance in anti-terror cooperation protest, have strengthened with a $60 bilateral aid and building program.
However Sri Lanka’s high debt, along with corruption scandals and political standoff, forced recourse to the IMF in 2016, and Pakistan is expected to return there imminently without additional backstop from more cash-strained Gulf donors. Currencies have plummeted in both places to aggravate food and fuel-price driven inflation, and the BRI cannot mask leadership doubts and fiscal and monetary policy lapses.
The CSIS analysis points out that Chinese projects barely benefit local contractors, as their own companies get 90% of funding. State-owned construction firms in particular, at seven of the world’s ten largest in 2017, can draw on massive size and subsidies. From 2000-2014 development bank credit totaled $350 billion, three quarters on commercial terms, with focus on the power and transport industries. In contrast with Western providers China’s approach is “centralized and flexible,” with unified agency decisions and relaxed environmental, social and governance standards. Natural resources are accepted for payment instead of cash, and capital outflow restrictions are not as strict for BRI deals, according to the document. It adds that large infrastructure schemes are unlikely to be completed on time or budget, and typical Chinese labor over-reliance will spark backlash.
In Davos Pakistan’s Prime Minister Shahid Khaqan Abbasi dismissed debt trap concern over the Economic Corridor with China, which he insisted would proceed under mutual “sustainability” principles and was designed to stimulate all foreign investment with energy and security improvements. However in December water authority officials scuttled a proposed $15 billion dam project over Beijing’s onerous financing demands, and railway deals in Karachi and elsewhere were also put on hold. In January the government’s own debt policy statement acknowledged deterioration in external servicing ratios across-the-board as the total hit $85 billion, versus $15 billion in foreign exchange reserves covering just three months imports. After successfully placing Eurobonds in conventional and sukuk form late last year, rating agency Moody’s warned that further rupee depreciation and the persistent 3-4% of GDP current account deficit would hurt “affordability.”
In Switzerland the Prime Minister spurned the prospect of immediate elections and IMF program application, as he previewed a tax amnesty to extend collection beyond the current less than 1% of the population and restrain public debt buildup at the 65% of GDP danger zone. He pointed to information technology as an emerging domestic demand driver buttressing traditional garment exports and remittances for 5% predicted economic growth this year, according to the World Bank. Double-digit credit increases and good monsoon rains should support near-term performance, but analysts caution that capital account trouble could materialize under currency flight and debt reimbursement pressures.
Sri Lanka’s official growth forecast is for the same pace, as foreign direct investment was estimated to double to $1.5 billion in 2017 amid good agriculture and tourism earnings. Going into February parliamentary polls President Maithripala Sirisena and his minority party are struggling with popular outcry over tax hikes and 8% inflation, with staple coconut prices doubling. The IMF arrangement aims to limit the fiscal gap to 5% of GDP, which the central bank has historically bridged through money printing. Domestic debt maturities peak this year and foreign ones over 2019-22, according to experts, but the President announced in January that he did not have a detailed accounting for $60 billion or 90% of previous external loans, a claim that stretched both credulity and comfortable Belt size.