The ‘China risk’ in African infrastructure investment

Chinese investments could help fund Africa’s much needed infrastructure, but high leverage will make African projects more exposed to any political risks from the country, Moody’s says.

The rise of Chinese investment in Africa should help narrow the continent’s infrastructure deficit, but future investment in African infrastructure could be significantly affected by any policy changes in China, according to a report from rating agency Moody’s.

“Although Chinese investment in Africa is relatively small at about $40 billion in 2016 (around 2 percent of the continent’s GDP), it has grown to 5 percent of total foreign direct investment in Africa in 2016 from just 0.2 percent in 2003,” Moody’s said in the report. “If this growth persists at half of the current rates, China’s investment position would reach $100 billion by 2020, or around 4 percent of African GDP,” a team of Moody’s analysts led by Colin Ellis, the chief credit officer for Europe, the Middle East and Africa, estimated.

The report highlighted that as 70 percent of Chinese investment between 2000 and 2015 was focused on infrastructure, this could help address the continent’s growing deficit in this area, especially in energy and transport, and potentially boost economic growth in some cases.

The projects Chinese investments supported have been mainly in basic infrastructure such as transport, communications and power facilities. Apart from African governments, China was the single largest sovereign source of funding for infrastructure projects in Africa between 2012 and 2016, the analysts said, citing data from the Infrastructure Consortium for Africa.

The investment momentum was driven by several policy initiatives, including the China-led One Belt One Road scheme, the memorandum of understanding signed between China and the African Union in 2015, together with $60 billion in funding commitments during the summit of the Forum on China-Africa Cooperation.

These investments have already helped narrow Africa’s sizeable infrastructure deficit, which the African Development Bank estimates at $150 billion a year. “On average, around half of the African population had access to electricity in 2016, compared with a third in the early 2000s,” according to the report.

However, Africa’s rising reliance on Chinese funds – the country’s banks accounted for 80 percent of loans received by African sovereigns between 2010 and 2015 – “future investment in Africa will be significantly affected by any policy changes in China”, the report’s authors warned.