China sees risks, profits in MENA
The Middle East and North Africa region has long had a reputation as a difficult environment for foreign investors. Nevertheless, Chinese private and state-led companies have been increasingly interested in the area, not only for natural resource exploitation but also for greenfield investment and the creation of commercial hubs.
However, Chinese investors have struggled to comprehend the complexity of the local business environment and the challenges imposed by sudden changes in government relations and abrupt eruption of violence and instability in the region.
Although minor compared to the investments China has in Eurasia and sub-Saharan Africa, Chinese foreign direct investment (FDI) in MENA is rising. In 2016, China became the leading investor in the region and last year Chinese President Xi Jinping pledged $23 billion in financial cooperation projects, humanitarian assistance and development aid to Arab countries.
The Chinese promise of infrastructural investment and sustainable development carried by the Belt and Road Initiative (BRI) is facing a harsh reality. News about the possible loss of $1 billion in the Djibouti-Addis Ababa infrastructure project is not coming from BRI critics but from China’s leading credit insurance entity, the China Export and Credit Insurance Corporation (Sinosure), whose concerns about the viability of the Addis-Djibouti Railway line exposed how some BRI-led infrastructure projects are in dire need of proper risk management.
Inaugurated at the beginning of 2018, the estimated $4 billion freight railway has been marred by power shortages and below predicted cargo volumes. The Addis Ababa-Djibouti loss of $1 billion is a case in point.
The inability to repay the Chinese loan in a timely fashion is the result of inflated expectations from both sides. How China restructures its loans will affect not only the MENA region but also other debtor countries renegotiating terms with Beijing.
On paper, the Addis Ababa-Djibouti railway, connecting the landlocked country to the maritime trade routes of the Red Sea, promised easy returns on investment. Reality differs. The Ethiopian government renegotiated a longer time frame for debt repayment — 30 years instead of the agreed 10 years — and Sinosure had to absorb $1 billion in losses.
While China has a long-standing economic presence in Africa, the Middle East is increasingly the target of Chinese FDI. As the United States progressively withdraws from the region’s economic and security situation, Chinese state-owned enterprises are gaining ground.
Nevertheless, in North Africa and the Middle East, to varying degrees, Chinese investors face a complex spectrum of risks due to the nature of transitions in the region.
However, for each of these countries, ties of all kinds with China have been strengthening and the BRI hopes to be a game changer in many ways. It has the potential to fill substantial parts of the gap in infrastructure financing across the region. In the long term, it could contribute to a more stable business and investment climate.
For now, though, Beijing’s investments are intertwined with significant risks — financial, environmental, social and governance-related — both for the recipient countries and for China. Considering the different context and specific political economic environment of each country, such investments may end up aggravating rather than mitigating risks. If China is going to fill the power vacuum created by American detachment from the region, it will represent an important shift in Beijing’s regional role.
Beijing’s diplomatic and economic support of the Bashar Assad regime in Syria, its increasing willingness to mediate in the Palestinian crisis or the increasing number of state visits in the Middle East represent the renewed importance of the region for Beijing.
To avoid making the same errors that have been seen in several cases of BRI state-led investments — such as the Ethiopia-Djibouti railroad — a broader Chinese financial engagement in the MENA region should include international financial institutions and public-private partnerships so that multinational development banks and the private sector can help to mobilise capital and, most important, supply the knowledge necessary to avoid costly mistakes.
International support to Chinese FDI should focus on a small number of flagship projects that include multiple stakeholders and exhibit a quantifiable positive effect. Engaging and cooperating with China in new infrastructure development is not only a way to share the investment risk burden but could increase the efficiency and the positive spillovers to all the involved stakeholders.