Wednesday, December 26, 2018

Debunking the China Debt Trap Myth, Sri Lanka/Hambantota Edition

[I've come to the opinion that a not insignificant chunk of China coverage that currently pops up in the Western media is an info op curated by China hawks in order to promote and exploit further polarization between the US bloc and the People's Republic of China.  And some of the info ops, including the articles in the big media outlets, don't hold up under close examination.

I extracted this post from the script of a China Watch show I did a year ago.  The "Hambantota debt trap" myth has served as the foundation for a year's worth of "Belt and Road" threatmongering for projects in Pakistan, Zambia, Maldives, and even Ecuador.  The data concerning Sri Lanka's debt trap--and who set the trap--makes for interesting and enlightening reading.  The China Watch episode of December 17, 2017 Donald Trump's China Hawk Clown College Now in Session, can be viewed by newsbud subscribers or rented via Vimeo.  CH 12-26-2018]

Hambantota is a Sinhalese expression meaning “flapdoodle peddled by China hawks and distributed by credulous anti-PRC journos”.  The flapdoodle in question is the assertion that the Hambantota Port is a scheme to create a debt trap against the island nation of Sri Lanka. 

The case is asserted that the PRC funds costly Belt and Road infrastructure projects the recipient can’t afford, then takes them over as strategic assets when loan repayments can’t be met.  Case in point: Sri Lanka, which is crushed by crippling forthcoming loan repayment obligations equivalent to 95% of its annual revenues.

Stories in the Western press on Sri Lanka’s debt crisis are usually illustrated by the Hambantota Port project on the south coast of Sri Lanka.  The Sri Lankan government just finalized an agreement to lease the port, a notorious white elephant, to the PRC on a 99 year agreement.

It looks like there is indeed a conspiracy here: a conspiracy by the ex-president of Sri Lanka, Mahinda Rajapaksa, to build an impregnable economic, patronage, and political base in his rural home province on the remote southern coast of Sri Lanka.  Rajapaksa borrowed money from the PRC to build a world class port, a world class international airport, a world class cricket stadium, and world class highways linking the prosperous north to impoverished Hambantota.  Didn’t work.  All of these magnificent facilities are unused and generating virtually no cash flow to pay back the loans to the PRC.

Rajapaksa was strongly pro-PRC thanks to the unstinting diplomatic and material support the PRC provided him during his war of annihilation against the Tamil insurgency.  In a detail neglected by fans of the world’s biggest democracy and current US Indo-Pacific bestie India--but rather important to our story--the Hindu Tamil insurgency was originally supported by India, trained by India’s Research and Analysis Wing, and, in a classic case of blowback, ended up assassinating Indian president Rajiv Gandhi.  

When Rajapaksa needed help to crush the insurgency, he turned to the PRC, not India, and when Rajapaksa wanted to build his follies at Hambantota, Hu Jintao—not fearsome BRI overlord Xi Jinping—was there to help.

However, Rajapaksa lost his bid for re-election in 2015 partly as a result of alleged Indian finagling, and the new government had no interest in trying to make Rajaipaksa’s hometown boondoggle turn the corner.

The whole “Hambantota debt trap” story plays out in an interesting way.

Sri Lanka faces a massive debt repayment burden of almost $4 billion dollars in the coming year; but the Hambantota port and airport account for less than $200 million of that.  That’s just 5% of the total.

Most of that obligation is now gone because the PRC took over 80% of the port in a debt for equity swap.  And under the terms of the lease, the PRC has to make a payment of $292 million dollars immediately out of total lease payments of $1.2 billion.  

That means that the Hambantota deal has freed up about $450 million dollars in cash for debt service next year.  Pretty sweet.

 The Hambantota deal was apparently a factor in the IMF’s decision to free up another quarter billion dollar tranche of loans on December 7 to help Sri Lanka with its balance of payments problem.

All in all, the Hambantota boondoggle is turning into something of a net positive for Sri Lanka.  And, if you look beyond the teeth gnashing by China hawks, the PRC’s move is a reassuring indication to BRI partners that the PRC will step up for refis and work outs of really crap projects.

In addition, India put in a bid for $300 million to operate the white elephant Rajapaksa Airport next to the port.  Vital counter chess move to deny air terminal facilities to a potential PRC naval base?  Or the price tag for staying in the political game in Sri Lanka by providing the government with another $300 million dollar windfall?

The other interesting number is this: Sri Lanka’s sovereign external debt is $50 billion.  Only $8 billion of that, about 16%, is held by the PRC.

Sri Lanka’s big debt repayment headache is not the Chinese.  It’s that the Sri Lankan government sold somewhere between one to two billion dollars of sovereign debt almost every year at near junk interest rates for rebuilding and social peace, well, social buy offs, after the catastrophic civil war with the Tamils.  

There was some economic growth going on but not enough to service those loans.  They’re starting to mature and guess what?  Those government bonds are held by international investors and, unlike the PRC government, those international investors aren’t interested in delay, rescheduling, renegotiating, or conversion.

So Sri Lanka’s in the arms of the IMF for bridge financing—linked, of course, to demands for domestic revenue and financial reforms—so it can go back to the international lending well again to roll over the debt it still can’t pay.

Who created the debt trap for Sri Lanka?  The usual suspects: money center banks like Citigroup, Deutsche Bank , HSBC and Standard Chartered and fund managers primarily in the US and Europe.


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