As the G20 summit kicks off, world leaders must take note of a burgeoning issue: the increasing role played by commodity traders in lending to Africa’s resource-rich states and the continent’s rising debt. At Global Witness, we think it is time the sovereign lending activities of these traders are subject to more scrutiny.
This time last year the future of a desperately poor, landlocked central African country lay in the hands of a few suited men huddled around a table in the sleepy Swiss town of Zug. These men worked for Glencore, an Anglo-Swiss trading giant and one of the UK's largest public companies.
Three years earlier, in 2014, in a move to secure access to oil, Glencore had lent Chad’s oil company around US$1.45bn. But the oil price crash later that year left the country struggling to meet the repayment schedule.
By the end of 2016, Glencore held 98 per cent of Chad’s external commercial debt. Eighty-five per cent of Chad’s oil proceeds – its primary source of revenue – was directed towards paying Glencore back.
Chad was mid-way through a support programme from the IMF at the time, but the multilateral suspended its lending until the country could bring its debt under control: Chad’s fiscal future was in Glencore’s hands.
Chad may be an extreme example, but it is a sign of things to come.
Debt levels in some of the world’s poorest countries have steadily risen since 2012. Forty per cent of lower-income countries now face significant debt challenges, the IMF recently warned. Paradoxically, among those most exposed are Africa’s oil-rich states. Of the eight countries experiencing “debt distress” – when the government cannot repay its loans on the agreed terms and timeframe – five are African oil producers.
Over the same period, commodity trading companies like Glencore have come to play a larger role in lending, squeezing traditional lenders like the IMF, states and banks. They do so to secure access to resources – and make a tidy margin on interest rates.
Contrary to the common narrative, African states owe more money to private institutions – including commodity traders – than to China, recent research shows.
Access to finance is important for all states, rich and poor, and access to lenders willing to take risks even more so for low-income countries. Debt in itself is not a bad thing, as long as the money is managed and used responsibility.
However, the arrival – or increased presence – of traders on the lending scene is concerning, and could be a key factor in Africa’s current debt problems.
Countries that borrow heavily from commodity traders are more likely to have debt problems. These loans are expensive – companies charge a “risk premium” – and the timeframe for repayment is usually tight. The main incentive for traders to lend is to secure access to oil, which means countries may mortgage off future oil production on set terms. This rarely plays in the country’s favour: not only do they end up with large interest rate bills to foot, they may also struggle to sell their oil at a competitive rate.
When problems do arise, they are harder to solve. If a country cannot pay back its debt, it must restructure it – an intense negotiation process. For this to work, all lenders need to be at the table and willing to cooperate. Traditional debt contracts contain clauses on collective action and equal treatment, and are generally a known entity. Such clauses may not exist in traders’ contracts, which are private and vary by case.
Moreover, as traders’ loans are often secured against oil, they are deemed more “senior” to others, meaning they rank above other, unsecured creditors in the restructuring hierarchy. The presence of traders as lending institutions therefore makes coordination around debt restructuring more challenging.
A live case is Republic of Congo, Sub-Saharan Africa’s third largest oil producer. The country is in the process of negotiating its third bailout from the IMF, which is stalling – like in Chad – due to its unsustainable debt levels, estimated at 125% of GDP at the end of 2017.
The IMF and credit rating agencies have been struggling to get a clear picture of how much Congo owes to whom and on what terms. In August 2017 the country’s debt-to-GDP ratio rocketed by 56 per cent overnight as the multilateral was informed of a further US$1.25bn worth of debt owed to Glencore and another trader, Trafigura.
For those who want to lend responsibly a plethora of voluntary guidance exists, but for everyone else it is a free-for-all. As the past work of Global Witness and others shows, responsible investment rarely appears to be a priority for many companies.
Laws in borrower states seldom have the nuance or teeth to regulate this form of lending – or are simply not enforced. In the US and UK – the world’s primary debt centres – there is no regulation governing traders’ sovereign lending practices.
Commodity traders – including Glencore, Gunvor, Trafigura, Vitol and others – have grown exponentially over the past decade and are today some of the biggest companies on the planet. Glencore and Trafigura rank fourteenth and thirty-second in the world by revenue in 2018, with Glencore sitting three slots below Apple and both well above Microsoft. They trade and transport our daily goods, but little is understood about their role as sovereign lenders and they mobilise considerable resources in an unregulated market.
It is time for governments, watchdogs and regulators to catch-up with changing trends, scrutinise this new sub-set of mega-lenders and take action. At a minimum, the world’s leading debt centres – the UK and US – should pass laws that require companies under their jurisdiction to publicly disclose any loans made to governments.
This year’s G20 summit is a great place to start.