Countries victims of 'ninja' loans
Allure of easy financing for infrastructure threatens sovereignty
by Herbert Poenisch in Beijing
Tue 27 Nov 2018
With the launch of its Infrastructure Asia agency, Singapore is the latest country to join the exclusive circle of infrastructure providers. This follows the creation in August of the US International Development Finance Corporation, which lends money for infrastructure projects in developing countries. Washington has also partnered with Japan and Australia to invest in infrastructure in the Indo-Pacific region. These countries are slowly catching up to China, which for years has provided finance on an unprecedented scale.
When Beijing launched its Belt and Road initiative in 2013, the national players, particularly the China Development Bank and the Export-Import Bank of China, had already provided bilateral loans for infrastructure projects in neighbouring countries. These exceeded funds provided by multilateral agencies such as the International Bank for Reconstruction and Development and the Asian Development Bank. To join the sphere of multilateral institutions, China launched its own contribution, the Asia Infrastructure Investment Bank.
Estimates show that infrastructure investment in Asia requires more than $1tn per year until 2030 to sustain growth momentum. However, it is odd that in the field of infrastructure development, needs should be driving real investments. In other areas that are closer and more basic to the population, such as food and housing, needs are less relevant for real investment. Providing food security at affordable prices and low-cost housing for poorer parts of the population do not drive investment. It is surprising, then, that all of a sudden investment is in the driving seat.
The explanation lies in the excess capacity available for producing infrastructure projects, such as power plants, roads and railways, ports, airports and communication links. China has upgraded its infrastructure and excels at designing, planning, implementing and maintaining such projects. Countries in need of this type of investment have noticed. China has demonstrated the importance of infrastructure for development. The US, on the other hand, has crumbling infrastructure and urgently needs domestic investment.
Countries need infrastructure in much the same way that US families needed houses before the 2008 financial crisis. The 'American dream' was to provide everyone with their own home. Similarly, poorer countries dream of infrastructure, to propel them to prosperity. This is where the parallel comes in: countries and individuals making costly purchases with no way of funding them. People in the US bought houses through 'no income, no jobs, no assets' ('ninja') loans, unsure of how to reimburse their bank. Countries are doing the same to fund infrastructure projects. Both groups were lured by easy financing conditions.
After the subprime crisis, houses were repossessed and families evicted. Ninja countries have current account deficits, are not part of the international supply chain and have a negative international investment position. If they default on their payments, rather than being repossessed, their infrastructure projects are leased. Sri Lanka's Hambantota Port, for example, is being leased to China for 99 years.
These contentious practices are seen as a threat to sovereignty, and must not spread. Countries should be allowed to participate in the planning, implementation, running and maintenance of projects. Local companies and workers should play a major role. Countries receiving infrastructure aid should be given preferential trade access, in order to earn foreign exchange to service their debt.
As those of us who play Monopoly know, the game can only go on if other players have enough income and assets. Otherwise it is 'Game over'.
Herbert Poenisch is a Member of the International Committee of the International Monetary Institute at Renmin University of China, and former Senior Economist at the Bank for International Settlements.
Tell a friend