Mongolia and Angola are most exposed to China, says Moody’s
How do you gauge a commodity exporter’s exposure to China? It sounds simple: the greater the share of commodities in a country’s exports, and the more those exports go to China, the greater the threat posed by China’s slowing economy and Beijing’s efforts to divert it from industrial investment to private consumption.
But some commodity countries, even those dependent on Chinese demand, are faring better than others. In its sovereign credit outlook for 2016, Moody’s Investors Service, one of the three big global credit rating agencies, set out to identify the emerging market governments whose creditworthiness is most in jeopardy.
According to Moody’s, Asia and sub-Saharan Africa will include the most countries at risk. Mongolia and Angola are at the top of its list.
Governments that are on track with structural reforms designed to diversify their economies and strengthen their fiscal positions will be better able to ride out China’s falling demand and the associated plunge in commodity prices, says Moody’s.
However, other analysts note that even governments that have cleaned up their own balance sheets may be at risk from a private sector exposed to the double whammy of commodities and China. Fitch Ratings this week joined those warning that private sector debt presents a threat to the creditworthiness of many EM sovereign issuers.
China’s appetite for goods produced in other countries is falling fast. In November, its imports were down nearly 19 per cent from a year earlier, according to the General Administration of Customs.
Mongolia’s exposure to this fall is stark. China takes 95 per cent of its exports, of which 83 per cent are commodities.
What is more, its defences are meagre. The government’s budget deficit has doubled this year and external debt is ballooning. The private sector is highly leveraged — corporate debt was equal to 85 per cent of gross domestic product in 2012. With export earnings falling, those debts will come under increasing strain. The state will be in little condition to help.
Mongolia’s plight is mirrored in parts of sub-Saharan Africa, where export dependence on China is at its highest in some of the most troubled, least developed and least diversified economies in the region.
“Sub-Saharan countries have little scope to reorient their exports to other destinations given subdued global growth prospects,” notes Moody’s.
China’s rapid entry into the region during the past decade was in part facilitated by the willingness of Chinese businesses and banks to go where others would not. Now, this could prove a double-edged sword.
Angola is a textbook case of the woes that await an economy that fails to diversify during its boom years. GDP growth peaked at 22.6 per cent in 2007, as Chinese demand rose to consume 50 per cent of all the oil from Africa’s second-largest oil producer.
Oil is Angola’s only export to China, and the oil sector provides 90 per cent of government revenues. As the oil price plunged, Angola’s currency went with it, falling more than 25 per cent against the dollar since October 2014.
The politically troubled Democratic Republic of Congo and neighbouring Republic of Congo are similarly exposed. The former is a major exporter of copper to China, while the latter pumps oil. Neither has developed significant economic sectors beyond extractives.
Others, though, have managed to diversify. Ethiopia is a significant exporter of food commodities to China, but as one among many export destinations. Its semi-authoritarian government has built up a fledgling industrial base while investing heavily in agriculture. “Ethiopia should be more resilient than other commodity-exporting countries,” says Sarah Baynton-Glen, Africa economist at Standard Chartered.
Moody’s also cites Kenya and Côte d’Ivoire as being less dependent on oil and metals exports. While both have built strong investment ties with China, only around 1 per cent of exports go to China from each.
Over in Asia-Pacific, Hong Kong, Singapore, South Korea and Taiwan are highly dependent on trade with China but they are not commodity exporters and their solid public accounts make them resilient to a downturn in demand, says Moody’s.
Taiwan, for example, “as a country with a triple A rating … can sustain these momentary shocks,” says Marie Diron, senior vice-president for credit policy at Moody’s.
Taiwan, like South Korea, is certainly exposed to China’s remodelling of its supply chain, as it starts to produce rather than import lower value-added products. But Moody’s says a legacy of sound institutional and economic policies will allow both to weather the downturn.
Indonesia, although a significant commodity supporter, has a relatively low level of foreign debt, Moody’s notes. Similarly, Brazil, despite its largely self-inflicted economic and political crisis, has a relatively small external sector and a current account deficit funded by foreign direct investment. South Africa’s troubles, too, are largely domestic in nature, says Moody’s, and its reliance on foreign currency is low.
Among advanced Asia-Pacific economies, Australia remains an outlier. Exports to China make up a small part of GDP, but commodities constitute 76 per cent of total exports. The commodity sector is softening and Australia’s GDP growth has slowed to 2 per cent. But as a diversified economy with low government debt, Australia has the means to generate new sources of growth that can offset China’s slowing demand, says Moody’s.
Stefania Palma and Adrienne Klasa