Uzbek President Shavkat Mirziyoyev attends a meeting with his Kazakh counterpart Nursultan Nazarbayev in Astana, Kazakhstan March 23, 2017. Photo: Mukhtar Kholdorbekov/Reuters

As Uzbekistan plans to follow its poor, isolated neighbor Tajikistan with an inaugural external bond, investor frenzy in the frontier market has cooled with higher spreads since the beginning of the year as a new Center for Global Development (CGD) report warned of “high distress risk” in commercial loans related to China’s Belt and Road Initiative (BRI).

Tajikistan is prominent on the think-tank’s danger list as public debt has soared in recent years to 57% of  gross domestic product, with China the largest creditor after its maiden US$500 million Eurobond in 2017. It is the first traditional Silk Road stop overland, and a $3 billion gas pipeline is the main bilateral project reaffirmed by Tajikistan’s Energy Ministry in January.

Of the almost 70 BRI loan-recipient countries the study tracked, one-third were in debt trouble and five of the eight most vulnerable were in Asia. In Central Asia, Kyrgyzstan and Mongolia were included, and Laos and Pakistan rounded out the broader region.

Mongolia had the steepest debt at 90% of GDP, with $30 billion in future infrastructure borrowing inviting “extremely high” default odds.

Kyrgyzstan’s Chinese border will face funding costs for roads, railways, and energy plants, after a “sizable” currency depreciation shock.

The paper focuses on unsustainable debt, but points out as well that Chinese relief policies are unpredictable in contrast with official Western lenders through the Paris Club and may exacerbate a crisis spiral.

Despite the $8 trillion in outlays envisaged over the coming decades, debt “overhangs” could weigh on public investment and general economic growth, critics caution.

Political controversy has likewise followed in the wake of the BRI, as in Sri Lanka with street clashes over the Hambantota port the Chinese now control for non-payment, and in Pakistan, where Beijing has directly appealed to opposition leaders to support the flagship China-Pakistan Economic Corridor.

Huge infrastructure challenge

The Asian Development Bank’s estimate of $1 trillion in annual infrastructure funding needs through 2030 underscores the size of the challenge, but ultimately sustainability will depend on specific project efficiency and productivity, according to the CGD paper.

For low-income countries in Central Asia, debt management requires a large concessional low- or no-interest portion, as practiced by many development institutions including the China-founded Asian International Infrastructure Bank. However, China’s Development and Export-Import Banks as the lead BRI channels do not disclose their terms, but they are denominated in dollars and renminbi for foreign-exchange risk and may be fully commercial.

No comprehensive database exists to monitor commitment status since President Xi Jinping launched the BRI scheme three years ago, so the authors tap a combination of US academic and government research and Chinese official interviews.

The debt vulnerability threshold is 50% of GDP based on longtime emerging-market understanding, and current and near-term figures are compiled from International Monetary Fund Article IV reviews.

Mongolia turned to the IMF for a multibillion-dollar rescue last year, and alongside the package China’s central bank renewed a currency-swap line and its Exim Bank offered concessional rates on power and highway loans.

Kyrgyzstan owes the same bank $1.5 billion, or 40% of external debt, and seeks comparable lenient conditions for construction of electricity facilities.

Five years ago Beijing wrote off Tajikistan’s obligations to an unknown degree in exchange for disputed land. Its total outstanding claims are likely equal to the Paris Club’s $300 billion, but China’s confidential case-by-case approach to emergencies is in contrast with the Western group’s history of mutually agreed explicit reductions, and the two should join in collective action, the CGD document recommends.

Uzbekistan in transition

Uzbekistan is already in the BRI as it reportedly prepares an initial global bond foray to cap months of economic and financial sector change since President Shavkat Mirziyoyev replaced his authoritarian predecessor. The foreign-exchange regime was liberalized after the official rate was devalued by 50% last September.

GDP growth should be 6% this year and the World Bank’s chief executive officer recently visited Uzbekistan to praise the rise in “Doing Business” rankings as the country intends to enter the World Trade Organization. Mirziyoyev vows to eliminate forced labor and diversify the natural-resource-heavy economy through state-enterprise divestiture.

However, massive firings of allies of the former regime, including hundreds of Finance Ministry employees, have been a main preoccupation since the preliminary adjustments and investors may have to purge portfolios from additional debt downside.

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation,...

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