Identifier
Created
Classification
Origin
06LUANDA464
2006-05-03 11:53:00
CONFIDENTIAL
Embassy Luanda
Cable title:  

ANGOLA: A REALITY CHECK ON THE CHINESE CREDIT LINE

Tags:  ECON EFIN EINV EPET ETRD PREL CH AO 
pdf how-to read a cable
VZCZCXRO2244
OO RUEHMR
DE RUEHLU #0464/01 1231153
ZNY CCCCC ZZH
O 031153Z MAY 06
FM AMEMBASSY LUANDA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2810
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHBJ/AMEMBASSY BEIJING 0085
C O N F I D E N T I A L SECTION 01 OF 03 LUANDA 000464 

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/20/2016
TAGS: ECON EFIN EINV EPET ETRD PREL CH AO
SUBJECT: ANGOLA: A REALITY CHECK ON THE CHINESE CREDIT LINE

REF: A. PARIS 02362


B. 05 LUANDA 00847

C. 05 LUANDA 01341

D. LUANDA 00438

Classified By: Ambassador Cynthia G. Efird for reasons 1.4 B and D.

SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 03 LUANDA 000464

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/20/2016
TAGS: ECON EFIN EINV EPET ETRD PREL CH AO
SUBJECT: ANGOLA: A REALITY CHECK ON THE CHINESE CREDIT LINE

REF: A. PARIS 02362


B. 05 LUANDA 00847

C. 05 LUANDA 01341

D. LUANDA 00438

Classified By: Ambassador Cynthia G. Efird for reasons 1.4 B and D.

SUMMARY
--------------


1. (SBU) Since the announcement of a USD 2 billion credit
line from the PRC to GRA in March 2004, reports of increases
to the credit line, ranging from USD 1 billion to USD 10
billion, have proliferated. Regardless of the promised
value, actual implementation of the credit line is gradual
and unspectacular. By the end of 2005, the first billion
dollars was obligated but only a fraction of that amount had
been disbursed. However, it is important to note that many
large Chinese projects occur outside the context of the
credit line. The PRC also helped arrange USD 3 billion
oil-backed loan in late 2005, a far more immediate and
substantial contribution to GRA coffers than the credit line.


2. (SBU) The media has commonly credited the Chinese credit
line for dampening GRA interest in dealing with the
International Monetary Fund (IMF). This is an overstatement;
the Chinese credit line is only one source of funds among a
wider influx of credit lines, loans, and oil revenue. Though
Angola,s financial position has strengthened dramatically,
the GRA continues to signal its willingness to work with the
IMF and is in the process of implementing various
transparency measures. These measures may positively impact
management of the Chinese credit line and other sources of
government financing as well. End summary.

SPENDING THE CASCADE OF CHINESE MONEY?
--------------


3. (SBU) On March 28, a Reuters article quoted a businessman
who claimed that China,s EXIM Bank added an additional USD 1
billion to a USD 2 billion oil-backed credit line agreed in
March 2004, bringing the total credit line to USD 3 billion.
Previously, the GRA Minister of Finance openly asserted that

the government was negotiating to increase the credit line
with China and the Vice Minister noted that the credit line
could reach USD 6 billion, an assertion echoed by IMF
officials in 2005. In March 2006, Ref A reported that
Angolan authorities notified the IMF of a new USD 10 billion
credit line with China,s EXIM Bank. On April 14, the Vice
Minister of Finance told Angolan media that China contributed
58 percent of the USD 5.5 billion Angola has received in
loans since 2002, or the equivalent of USD 3 billion.


4. (C) Of this litany of promised billions, how much money
has actually reached Angola to date? Ref B notes that actual
implementation of the USD 2 billion credit line has been a
gradual, drawn-out process, with each project subject to the
rigorous approval of both the PRC EXIM Bank and the GRA. In
April 2005, more than one year after agreeing to the credit
line, the GRA announced that 18 out of 21 projects to be
funded by the first USD 1 billion tranche of the USD 2
billion credit line had been approved, but only 3 had begun
implementation. Chinese diplomat in Luanda, Chang Hexi, told
us in March 2006 that all 21 projects of the first tranche
are approved and implementation has begun for about 10
projects. A major source of delay was the 30 percent local
Angolan content requirement attached to the credit line,
which forced Chinese companies to secure local partners. Now
that these relationships have been established, Mr. Chang
believes that the second USD 1 billion tranche of the USD 2
billion credit line will be disbursed significantly faster
than the first. Indeed, by the end of May, the GRA Prime
Minister informed Parliament members that USD 800 million of
the second tranche had already been obligated.


5. (SBU) There is ample reason to doubt that the GRA can
spend the Chinese credit line as quickly as planned. Of a
targeted capital expenditure of USD 2.5 billion for 2005, the
GRA was only able to spend USDS 1.5 billion. Both the IMF
and World Bank have questioned whether the GRA can achieve
its targeted capital expenditure of USD 7.9 billion for 2006,
more than five times the previous year,s spending.


6. (C) Regarding reports of a third billion-dollar tranche,
Mr. Chang noted that while the possibility of further
increases to the credit line exists, no formal agreement has
yet been concluded. Negotiations on new credit lines will
depend on the successful conclusion of at least some projects
funded by the initial USD 2 billion. GRA officials, while
noting the possibility of increases, have never announced a
third billion-dollar tranche. The Reuters correspondent who
reported the credit line increase to USD 3 billion,

LUANDA 00000464 002 OF 003


information attributed to a &senior financial source,8
informed EmbOff that no one else has yet been able to
corroborate this information.

THERE,S MORE THAN JUST A CREDIT LINE...
--------------


7. (SBU) It appears that the USD 10 billion dollars reported
by the IMF refers not to an increase in the Chinese EXIM
credit line, but rather to the future GRA Public Investment
Program (PIP) for which China will be the major financier.
It is uncertain what percentage of the USD 10 billion PIP
will consist of PRC financing, but it will include projects
funded by entities other than the PRC EXIM Bank. Projects
taking place outside the context of the USD 2 billion credit
line include the new Luanda international airport (estimated
USD 400 million),the Luanda and Benguela railroad lines
(estimated USD 200 to 300 million each),telecommunications
upgrading (estimated USD 400 million),rehabilitation of all
domestic airports, and more. These projects are financed by
a variety of private and public Chinese entities.


8. (C) The PRC also assisted Angola in the acquisition of its
largest oil-backed loan. In late 2005, the GRA and state oil
company Sonangol worked with the PRC and Chinese oil company
Sinopec to arrange a USD 2 billion oil-backed loan (Ref C),
syndicated by France,s Calyon Bank. According to an
international banking representative, a consortium of sixteen
international banks oversubscribed the loan, causing Calyon
and Sonangol to increase the deal to USD 3 billion. Part of
the loan refinances a previous 1.225 billion loan arranged in
2003, but roughly USD 1.8 billion represents new money. With
interest rates at 250 basis points above the London Interbank
Offered Rate (LIBOR) and a 7-year repayment period, the terms
are significantly better than those for Sonangol,s previous
oil-backed loan syndicated in 2004, which featured interest
rates of 312.5 to 337 basis points above LIBOR and a 6-year
repayment span. Sinopec subsidiary Unipec plays a critical
role in the deal as the &offtaker,8 or buyer of oil
collateral in the loan,s security guarantee.


9. (SBU) While Sonangol and Angola,s rising reputation as
reliable borrowers helped fuel international lenders,
interest, leading to loan oversubscription and improved
terms, China,s involvement through Unipec was instrumental
in shaping a favorable deal. Previous oil-backed loans with
Sonangol had been guaranteed by special purpose vehicles
(SPVs),juridically independent entities established to
channel Sonangol,s oil revenues to the lenders. The
Calyon-syndicated loan offers a simpler structure by
replacing the SPV with Unipec. Unipec, as holder of the
major offtake contract, will purchase 40,000 barrels of oil
per day from Sonangol until September 2008 to collateralize
the loan. (Note: 40,000 barrels at current production rates
represents less than 3 percent of daily production. End
note.) Offtake contracts with other oil buyers are also in
place to cover the period following 2008. Even at USD 23 per
barrel, oil revenues would be sufficient to pay off the loan
within the 7-year repayment period. International financiers
have credited this structure, underpinned by Unipec as the
main oil purchaser, for enhancing the attractiveness and
pricing of the deal.


10. (SBU) The USD 3 billion Calyon-syndicated loan is a far
more significant Chinese contribution to Angolan coffers than
the credit line, even though it has received less media
attention. The Chinese credit line is disbursed slowly,
project by project, and the money is paid directly from the
PRC EXIM Bank to Chinese companies without passing through
GRA hands. The USD 3 billion Calyon oil-backed loan, on the
other hand, is immediate &money in the bank8 for the GRA
and could not have been so successful without the PRC,s
intervention.

...AND THERE,S MORE THAN JUST CHINA
--------------


11. (SBU) Ref D lists many credit lines that the GRA has
negotiated with other nations since 2004, including USD 580
million from Brazil, 400 million euros from Portugal, and 100
million euros from Germany. Besides these officially-backed
credit lines, five private Spanish banks have arranged credit
lines that range from 100 million euros to USD 400 million,
totaling as much as USD 1 billion. Of this amount,
approximately USD 300 million has already been obligated to
specific projects whereas the remainder may be obligated by
the end of 2006. Just as rumors persist about increases to
the Chinese credit line, banking sources assert that the GRA
will receive even more private and government-backed credit
lines from countries other than China.

A THREAT TO TRANSPARENCY? SURPRISINGLY NOT

LUANDA 00000464 003 OF 003


--------------


12. (SBU) Conventional media commentary contends that the
availability of the USD 2 billion Chinese credit line has
dampened Angola,s will to implement transparency and good
governance reforms exhorted by the IMF. The IMF has
repeatedly discouraged the GRA from taking out oil-backed
loans, citing their high cost and negative contribution to
Angola,s external debt. The GRA argues that such loans are
necessary to fund reconstruction work in the absence of other
sources of financing. However, the GRA also responded
positively to an IMF invitation to explain the terms and
structure of its loans and will send a mission to the IMF in
the near future.


13. (SBU) The GRA has taken steps to improve good governance
that directly affects management of the credit lines. In
early 2006, the Ministry of Finance issued and enforces a
decree that established strict credit line release procedures
for all projects over USD 10 million. In March 2006, the GRA
announced that it is preparing a new law of public
acquisition that will require public bidding for all
government procurement contracts. Given the large purchases
to be made via credit lines, improvement in this area will be
essential to controlling corruption.

COMMENT: CONTEXTUALIZING CHINA,S INFLUENCE
--------------


14. (C) GRA officials have made it clear that while they
welcome a strong working relationship with the IMF, they do
not need the IMF to carry out domestic economic policy.
China,s bilateral credit line to Angola without doubt has
increased Angola,s range of options and bargaining power
vis-a-vis international organizations such as the IMF.
However, China is only one contributor of many to Angola,s
burgeoning coffers, the source of the government,s
confidence and financial self-sufficiency. For example,
Chevron alone delivers more in taxes, royalties, and oil
production shares to the GRA than China could realistically
disperse to the GRA through its credit line in any given
year. Spanish private banks are offering credit lines that,
when added together, may exceed USD 1 billion. The
Calyon-syndicated oil-backed loan, in which international
banks and Sinopec played key roles, contributes more to the
Angolan treasury than any credit line.


15. (C) Comment continued: The major difference is that the
Chinese credit line, unlike the fragmented and varied
financial arrangements made by individual private sector
actors, comes in one consolidated pipeline from a state
clearly pursuing energy security interests. This financing
is thus more high-profile and more overtly political, even
though the underlying motives for the Chinese credit )-
demand for Angolan oil and commercial interest in Angola,s
reconstruction boom )- are the same as those of private
actors.


16. (SBU) Comment continued: Given the varied sources of
external financing that the GRA receives, the Chinese credit
line is only one piece of a far larger puzzle with regard to
transparency. The effort to ensure that the Chinese credit
does not contribute to corruption cannot be divorced from
larger efforts to improve transparency in oil revenues,
government procurement processes, credit line disbursement,
and loan structures. End comment.
EFIRD