China Belt-Road Plan Seen Adding Debt Risk From Djibouti to Laos

(Bloomberg) -- China's Belt and Road Initiative creates the potential for debt-sustainability problems in some of the world's weakest economies, according to the Center for Global Development.

The infrastructure project -- aimed at forging new economic links with Europe, Asia and Africa -- puts Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan “at particular risk of debt distress,” researchers at the Washington-based research institute said in a report on Sunday.

“Belt and Road provides something that countries desperately want -- financing for infrastructure,” co-author John Hurley, a visiting policy fellow on leave from the U.S. Treasury Department, said in a statement with the report. “But when it comes to this type of lending, there can be too much of a good thing.”

Financing comes in various forms, including from dedicated institutions such as the Silk Road Fund, the Asian Infrastructure Investment Bank and the National Pension Fund. State-owned banks have lent billions of dollars to hundreds of projects in countries where most investors fear to tread.

A Bloomberg News analysis in October showed that of 68 nations China lists as Belt and Road partners, the sovereign debt of 27 was rated as junk, or below investment grade, by the top three international rating firms. Another 14, including Afghanistan, Iran and Syria, were either not rated or have withdrawn their requests for ratings.

Read More: New Silk Road Runs Straight Through Junk Territory

The report by Hurley, CGD senior fellow Scott Morris and researcher Gailyn Portelance recommends that China make the Belt and Road Initiative more multilateral and that development bodies like the World Bank work toward a more detailed agreement with Beijing on lending standards for the initiative's projects, no matter the lender.

Given China's role as a creditor to developing countries, “there is a case for directing some of these aid dollars in ways that mitigate the risks of commercial lending and better promote the development impact of that lending,” they said.

To contact Bloomberg News staff for this story: Jeff Kearns in Beijing at jkearns3@bloomberg.net.

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger, Jana Randow

©2018 Bloomberg L.P.

With assistance from Jeff Kearns