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New deal with China on interest payments offers Angola some relief

The unusual move will turn a portion of Angola’s collateral toward debt payments as the African nation works to pay back its biggest creditor.

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PUBLISHED

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2 Minutes

UPDATED: 14 May 2024, 7:59 am

Angola has struck a deal with its largest single creditor, state-owned China Development Bank (CDB), to release money held in a Chinese-controlled escrow account to pay interest on a key loan.

While the African nation enjoyed a three-year moratorium on its debt payments to China during the worst of the Covid-19 pandemic, the resumption of payments in 2023 hit the country hard, exacerbating a sharp economic downturn and devaluing its local currency. Angola currently owes China around US$17 billion, just over a third of its total debt, mostly in the form of oil-backed loans.

The escrow account provides collateral on this debt, requiring Angola to maintain a minimum amount of US$1.5 billion and to increase payments when oil prices rise above US$60 a barrel. 

The new agreement to release US$150-200 million monthly from the account for interest payments allows Angola to pay its debts quicker while avoiding a broader debt restructuring.

[See more: Angola and China agree to stronger ties]

Though stopping short of outright debt forgiveness, Chinese banks have consistently worked to provide payment relief to poor countries struggling to repay loans. Other forms of support include currency swap lines, aimed at helping emerging market borrowers meet their debt obligations.

China’s willingness to release funds to Angola will offer “some liquidity relief” explains Thys Louw, an emerging market debt portfolio manager at asset manager Ninety One, but the country will “need alternative sources of financing.” 

Angola is not seeking additional IMF loans, remains undecided on issuing a US dollar bond and cannot rely on its own relatively small local debt market, making an international loan the likely choice. “The problem will be that they will have to pay quite a high price,” warns Louw.

Angola’s effort to diversify its economy away from crude oil – which plummeted in value during the pandemic and thereby undermined the country’s ability to meet its payment obligations – is still a work in progress. Angola’s decision to leave OPEC last year opens the door to keeping production high as sectors like agriculture and tourism are developed, an effort China actively supports.

UPDATED: 14 May 2024, 7:59 am

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