How do you gauge a commodity exporter’s exposure to Chna? It
sounds simple: the greater the share of commodities in a country’s exports, and
the more those exports go to China, the greater the threat posed by China’s
slowing economy and Beijing’s efforts to divert it from industrial investment
to private consumption.
But some commodity countries, even those dependent on
Chinese demand, are faring better than others. In its sovereign credit outlook
for 2016, Moody’s Investors’ Service, one of the three big global credit rating
agencies, set out to identify the emerging market governments whose
creditworthiness is most in jeopardy.
According to Moody’s, Asia and sub-Saharan Africa will
include the most countries at risk. Mongolia and Angola are at the top of its
list.
Governments that are on track with structural reforms
designed to diversify their economies and strengthen their fiscal positions
will be better able to ride out China’s falling demand and the associated
plunge in commodity prices, says Moody’s.
However, other analysts note that even governments that have
cleaned up their own balance sheets may be at risk from a private sector
exposed to the double whammy of commodities and China. Fitch Ratings this week
joined those warning that private sector
debt presents a threat to the creditworthiness of many EM sovereign issuers.
China’s appetite for good produced in other countries is
falling fast. In November, its imports were down nearly 19 percent from a year
earlier, according to the General Administration of Customs.
Mongolia’s exposure to this fall is stark. China takes 95
percent of its exports, of which 83 percent are commodities.
What is more, its defences are meagre. The government’s
budget deficit has doubled this year and external debt is ballooning. The
private sector is highly leveraged-corporate debt was equal to 85 percent of
gross domestic product in 2012. With export earnings falling, these debts will
come under increasing strain. The state will be little condition to help.
Mongolia’s plight is mirrored in parts of sub-Saharan Africa,
where export dependence on China is at its highest in some of the most
troubled, least developed and least diversified economies in the region.
“Sub-Saharan countries have little scope to reorient their
exports to other destinations given subdued global growth prospects, “ notes
Moody’s.
China’s rapid entry into the region during the past decade
was in part facilitated by the willingness of Chinese businesses and banks to
go where others would not. Now, this could prove a double-edged sword.
Angola is a textbook case of the wolves that await an
economy that fails to diversify during its boom years. GDP growth peaked at
22,6 per cent in 2007, as Chinese demand rose to consume 50 per cent of all the
oil from Africa’s second-largest oil producer.
Oil is Angola’s only export to China, and the oil sector
provides 90 per cent of government revenues. As the oil price plunged, Angola’s
currency went with it, falling more than 25 per cent against the dollar since
October 2014.
The politically troubled Democratic Republic of Congo and
neighboring Republic of Congo are similarly exposed. The former is a major
exporter of copper to China, while the latter pumps oil. Neither has developed
significant economic sectors beyond extractives.
Others, though, have managed to diversity. Ethiopia is a
significant export of food commodities to China, but as one among many export
destinations. Its semi-authoritarian government has built up a fledgling
industrial base while investing heavily in agriculture. “Ethiopia should be
more resilient than other commodity-exporting countries,” says Sarah
Baynton-Glen, Africa economist at Standard Chartered.
Moody’s also cites Kenya and Cote d’Ivoire as being less
dependent on oil and metals export.
Source:FT
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