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Can Tourism Be the Ticket to Turkey’s Economic Recovery by EOS Intelligence
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Can Tourism Be the Ticket to Turkey’s Economic Recovery?

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Tourism is one of the most dynamic and fastest-growing sectors in Turkey. The country is highly reliant on tourism for foreign exchange earnings. However, the COVID-19 outbreak and the Russia-Ukraine war have affected the country’s tourism industry and resulted in a decline in tourist visits. While the spike in energy and commodity costs due to war has widened the current account deficit gap, it has also made tourism cheaper in the country due to a significant decline in currency value. This has resulted in an unprecedented influx of tourists once the pandemic subsided. Furthermore, various initiatives have been taken by the government to boost tourism in hopes of reducing the current account deficit, bringing down inflation rates, and supporting economic growth.

Turkey is known for its vast historical sites in the major cities of Istanbul and Antalya, as well as the Aegean and Mediterranean Sea coasts. The tourism sector employs about 2.6 million people in the country. The sector also contributes significantly to new tourism-related business sources and foreign exchange earnings and, thus, plays a crucial role in the economic development of the country, especially in the post-COVID era. In 2021, it is estimated that Turkey generated about US$25 billion in revenue from the tourism sector.

The country’s dependence on tourism has increased significantly over the past few years. Turkey’s travel and tourism sector contribution to GDP increased to 11% in 2019 as compared with 4.7% in 2014. As per the United Nations World Tourism Organization (UNWTO), Turkey was the sixth-most visited country in the world in 2019. While the country’s rank came down to 15th in 2020 due to the COVID-19 outbreak, it jumped to fourth in 2021 in the post-COVID-19 recovery phase.

In addition to this, as per the 2022 Economic Impact Report (EIR) by the World Travel and Tourism Council, Turkey’s Travel and Tourism GDP is expected to increase by about 5.5% on an annual basis over the next decade (2022-2032) and create over 716,000 new jobs in the country. The projected growth rate in the country’s travel and tourism sector is more than double the projected growth rate of the overall economy, which is expected to be 2.5% during the same time period.

Challenges faced by the tourism sector over the years

While the tourism sector remains one of the best-performing sectors in Turkey, it has faced its own set of challenges over the past several years. Inflation has been rapidly rising in the country since 2016 due to factors such as low-interest rates, the energy crisis, an increase in commodity prices, and declining currency value. This has significantly affected domestic travelers and business owners in the tourism sector. Several terrorist attacks, particularly in the southeast part of the country and Istanbul and Ankara by the Kurdistan Workers’ Party (PKK) and ISIS, also severely affected tourist visits and economic growth in 2016.

Owing to the 2020 COVID-19 outbreak, spending on tourism by international visitors in Turkey declined by about US$20 billion, a 70% decline in comparison with 2019. This led to a decline in demand and unemployment in related sub-sectors, including airlines, travel agencies, hotels, and car rental companies, among others.

Stringent measures and trade restrictions resulted in a significant decline in air traffic and affected the aviation industry. For instance, the National carrier, Turkish Airlines, reported a net loss of about US$761 million in 2020.

The hospitality industry was also hit due to a fall in tourism in the country. Most hotels faced significant revenue loss during lockdown months. According to the Turkish Hotel Association (TUROB), the hotel occupancy rate in the first nine months of 2020 was just 35.4%, a decline of 47.8% from the same time period in the previous year. Moreover, revenue per available room declined by 52.5% to US$24.7 during the same period.

Can Tourism Be the Ticket to Turkey’s Economic Recovery? by EOS Intelligence

The 2022 war between Ukraine and Russia further affected the tourism sector growth in Turkey. Tourist visits from Russia and Ukraine used to account for a significant share of the total number of tourists visiting the country for holidays from Europe. Over 4.7 million Russians and 2 million Ukrainians visited Turkey for vacation in 2021. While 2.2 million Russians visited Turkey during January-July 2022, it is expected that the total number of tourists from Russia in 2022 will fall short of the 2021 figures due to prolonged war and the imposition of western sanctions and flight suspension. The number of tourists from Ukraine declined to 374,000 in the first seven months of 2022, in comparison with 1.1 million during the same period in 2021. The war also spiked Turkey’s inflation rate, which touched about 80% in August 2022.

While the Turkish government is trying to attract tourists from Russia by collaborating with Turkish aircraft to transport foreign guests amid war, it is not likely to recover tourist visits to pre-war levels.

Depreciating currency value boosts tourism in the country

The increase in the current account deficit due to rising energy and commodity costs in the backdrop of war in Ukraine has led to a massive currency value plunge for the Turkish Lira in 2022. Turkey is a net importer of oil and gas, and a spike in energy costs amid the Ukraine-Russia war has widened the current account deficit gap. As per the Turkish Central Bank data, the current account deficit increased to about US$32.4 billion in the first half of 2022. As of September 2022, the Turkish Lira declined to about TRY18.3 per US$1 compared with an average of TRY 8.9 per US$1 in September 2021 and is likely to decline further in 2023 with rising inflation rates due to interest rate cut.

A significant plunge in the currency value has made Turkey a more affordable destination for holidays in comparison with other European tourist destinations. The cost of stay, food, and travel has become significantly lower for foreigners. Adding to this, there has been a decline in COVID-19 cases across the globe, which has also provided the tourism sector a strong boost.

The number of foreign tourists visiting Turkey increased by 94% in 2021 (compared with 2020), reaching 24.7 million. It further witnessed a y-o-y increase of about 128% for the period of January-July 2022 to reach 23.3 million tourists during the period. The country’s revenue from tourism also witnessed a y-o-y increase of 190% in Q2 2022 to reach US$8.72 billion. In 2022, Germany accounted for the largest share of visitors, reaching 2.9 million from January to August. The number of tourists from Middle Eastern and European countries has also increased significantly in 2022. This has also resulted in an increase in share prices of Turkish Airlines. For instance, the share value of Turk Hava Yollari AO, also known as Turkish Airways, increased by about 147% between January and May 2022.

Since Turkey is highly reliant on tourism for its foreign exchange earnings, the significant boost in tourism is likely to help lower the widening current account deficit in the country. A low current account deficit is likely to increase the value of the Lira and, thus, bring down the inflation rate and support economic growth. However, further decline in interest rates by the Central Bank is resulting in an increase in the inflation rate, which reached 80.2% in September 2022. Therefore, while tourism can help soften the blow on the economy by reeling in foreign currency and earnings, it is unlikely that it will single-handedly help the economy recover from the ongoing crisis. That being said, the government is undertaking several efforts to capitalize on the growth in the tourism sector and provide a much-needed cushion to the economy as a whole.

Initiatives aimed at boosting tourism in the country

The Turkish government realizes the role tourism can play in uplifting the economy and has been undertaking several initiatives to boost the sector. For instance, in 2021, the government adopted a new promotion strategy, ‘Go Turkey’, to boost tourism. The ‘Go Turkey’ website encompasses the use of advanced technologies such as artificial intelligence and communication models. It follows over 100 media and social media outlets which cover news about the country. Additionally, it also analyses positive or negative content on Turkey and determines promotion priority based on this analysis. The aim is to focus on advanced public relations by integrating all 81 provinces under the system and promoting tourism together as a single voice.

A few other initiatives taken up to boost tourism in the country include additional domestic flight routes, medical tourism support, transportation infrastructure development, and several hotel investments. In August 2022, Turkish Airlines signed a deal with the Services Exporters’ Association (HİB) to help increase medical tourism in Turkey to meet the medical tourism industry’s export service revenue target aimed at US$5 billion in 2023.

About US$172 billion has also been invested in communication and transportation infrastructure during 2003-2021, and the government is planning to invest an additional US$198 billion by the end of 2053. Some of the key ongoing projects include The MBB – Gari – Mezitli Metro, The IBB – Kazlicesme – Sogutlucesme Metro Line, and the IMM – Ucyol-Buca Koop Light Rail, among others, aimed at boosting the transportation network in the country. Additionally, according to the Hotel Association of Turkey (TÜROB), new investments were planned in about 30 provinces in the first half of 2022. The new investment incentive includes applications for 11 five-star hotels, 18 four-star hotels, and 26 three-star hotels.

As of March 2022, TUI Group, a leading German travel and tourism company, together with its partners in Turkey, planned on expanding its holiday program and developing a winter program across destinations to attract more tourists as compared with pre-pandemic levels.

Additionally, in July 2022, Cengiz Construction, a leading construction company, started the construction of villas and hotels in Bodrum’s Cennet Bay together with Bulgari, a luxury hospitality company, with a significant increase in international visitors in the country.

Furthermore, travel companies and agencies are focusing on the adoption of digital platforms to promote tourism in the country as people are becoming more technology savvy and prefer online booking. It also helps attract travelers from different countries across the globe. Hotel booking through digital platforms increased to 81% in 2019, up from 73% in 2014, and is expected to increase further with rising penetration of smartphones and easy internet access. Turkey’s Tourism Development Agency (TGA) is likely to spend about US$100 million to promote tourism in over 120 countries through internet platforms and media in 2022.

EOS Perspective

Tourism contributes a significant amount to the Turkish GDP and is likely to help limit the consequences of increasing commodity and energy prices by reducing the widening current account deficit gap and easing the pressure on the economy. That being said, it is unlikely to help the country recover completely from its economic woes. Although the depreciating Lira has made Turkey a very affordable destination for holidays, people operating in tourism businesses are significantly affected by the high inflation levels as well. Hotels and resorts are facing high costs of employee wages, food supplies, and car rents, among others, which hurt their profits. Interest rates cut by the Central Bank are further increasing the inflation rate. In addition to this, the key tourist season, which is the summer season for Turkey, lasts for just a few months, and the sector’s revenue and profitability fall in the winter season. This makes it evident that the Turkish economy must base its recovery on a balanced mix of support across several sectors.

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence
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Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence

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Sri Lanka is currently facing its worst economic crisis since its independence and is the first country in the Asia-Pacific region to default on its external debt in over two decades. While the financial crisis is underpinned by political mismanagement, low tourism during COVID-19, and affected exports and payments due to the Ukraine-Russia war, growing Chinese debt in recent years is also considered to be a major factor in the country’s financial downfall. More so, with China withholding desired and critical support at this time, more questions are being raised over China’s relationship with Sri Lanka. This has provided India and to an extent, the West, with the perfect opportunity to strengthen its ties with the country and in turn limit China’s political and economic influence in the region.

In April 2022, the Sri Lankan economy witnessed an absolute collapse owing to skyrocketing inflation, shortage of essential goods such as fuel, food, and medicines, and foreign debt to the tune of US$50 billion with just US$2 billion in foreign reserves. The financial turmoil further spiraled into a political crisis with the president, Gotabaya Rajapaksa, fleeing the country amidst strong public outcry.

There is no one cause for the freefall of the economy. However, the situation is largely underpinned by unforeseen factors such as halt in tourism earnings due to the pandemic, the Ukraine-Russia war, which resulted in blocked payments from Russia for tea exports, along with deep-rooted issues such as political corruption, favoritism, and weak policies.

An example of weak governance could be the 2019 tax cuts and 2021 ban on imports of synthetic fertilizers and pesticides, which forced majority of farmers to go organic overnight. While the ban on pesticides import was aimed at saving US$400 million that were spent annually on import of fertilizers (in addition to reducing the adverse effect of pesticides on health and environment), the move backfired as the ban led to a substantial drop in crop production. As a result, Sri Lanka had to spend US$450 million on rice imports to cover up for the 20% drop in rice production levels. Moreover, it saw a decline in tea exports by 18% due to limited production. To offset this loss by farmers, the government had to spend several hundred million dollars as compensation and subsidies for farmers who lost their livelihoods. While the policy was removed after only five months for some sectors such as tea production, the damage was done causing a huge dent to the economy.

However, one of the key reasons for the country’s downfall is attributed to the government’s close alliance with China and to several economically unviable infrastructure projects that were green-lighted with China’s financial support and influence. Currently China is Sri Lanka’s biggest unilateral creditor.

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

The Rajpaksa family, which has dominated Sri Lankan politics for the last two decades, has been a close ally of China, and has favored investments from the country at the cost of relations with India and other nations that have for long warned Sri Lanka (and other Asian and African countries) about China’s debt-trap diplomacy. Over the last 15 years or so, Sri Lanka’s government has authorized several Chinese infrastructure projects including some that were considered economically unviable.

One such example is the Sri Lankan Hambantota Port that was built by China Harbor Engineering Company on a loan of about US$1.26 billion taken by Sri Lanka from China. The project, which was also touted to be commercially unviable from the very start by several experts and was cleared primarily because of close ties between China and the Rajpaksa family, was a commercial failure. In 2017, the port was handed over to the Chinese government for a 99-year lease due to default in loan payment. Similarly, the Hambantota airport is considered to be one of the emptiest airports in the world and has not been attracting traffic as anticipated, while the Nelum Kuluna towers (touted to be the tallest building in South Asia), stand empty. This has resulted in huge debt to the Chinese government from projects that failed to generate revenue for Sri Lanka. Sri Lanka owes 10% of its total foreign debt to China alone.

Now in the midst of its worst financial crisis and ridden of the old political regime, Sri Lanka is realizing the burden of the foreign debt it has to China. Especially at the moment, when the support received from its once most valued partner has been lukewarm at best.

China has largely maintained silence on the current economic crisis faced by Sri Lanka as well as on the political turmoil and fall of the Rajapaksa clan. It has adopted a ‘wait and watch’ approach, which is being criticized globally. More so, China has only provided minimal relief support to the nation in crisis. To put it into perspective, China has provided only US$74 million of aid and has sent a large shipment of rice to Sri Lanka in response to the large-scale monetary assistance requested by the Rajapaksas, before their departure. Moreover, China has turned a deaf ear to Sri Lankan government’s plead for loan restructuring and is yet to consider the request for an additional financial aid of US$4 billion (which encompasses US$1 billion loan, US$1.5 billion credit line for Chinese imports and US$1.5 billion in bilateral currency swap). Furthermore, China has not cleared its stance on IMF’s relief package for Sri Lanka. While IMF is designing a relief package for Sri Lanka, it needs consent from all its creditors to write off some loans so that the relief sum is used for economic revival instead of just servicing foreign debt. While Sri Lanka is urging the IMF and China to work together, it is going to be a long round of negotiations.

On the other hand, India has been increasing its influence on its neighbor and has provided US$3.8 billion in monetary relief to Sri Lanka. In addition, it is willingly working with IMF to restructure loans to provide debt relief to the country in need. It is also collaborating with Japan to assist Sri Lanka during the crisis. Sri Lanka is of strategic importance to India as it connects several of its key trade routes to Africa and Europe. With China having close ties with Sri Lanka in the past, it had built a strong foothold in the Indian Ocean, which was threatening to India and led to a geopolitical rivalry between India and China.

This financial crisis comes as an opportunity to India to replace China as Sri Lanka’s preferred partner. In March 2022, the Indian government signed a deal with Sri Lanka to develop hybrid power projects in northern parts of the country after China suspended a similar project in December 2021, stating security reasons. Around the same time, India was awarded a US$12 million contract to build wind farms on three small islands in the Palk Strait (which lies between southern India and Sri Lanka) after the project was taken away from a Chinese firm. In March 2022, India’s National Thermal Power Corporation (NTPC) also signed an agreement with Ceylon Electricity Board (CEB) to jointly set up a solar power plant in Sampur, Sri Lanka.

Moreover, in July 2022, several investment proposals to strengthen the economic ties between India and Sri Lanka were discussed between officials from both countries. The key sectors that were identified for investments by India in Sri Lanka include renewable energy, hydrocarbon, ports and infrastructure, IT, and hospitality. The talks also encompassed the development of the Trincomalee Port on Sri Lanka’s northeastern coast and a proposal to use Indian Rupee for transactions in Sri Lanka. In August 2022, the Sri Lanka government also gave an approval to Lanka’s Indian Oil Corporation (LIOC, a subsidiary of India’s Indian Oil Corporation) to open 50 new fuel stations in the country. While LIOC already operates 216 fuel stations in Sri Lanka, it plans to invest US$5.5 million in the proposed expansion. In a separate deal in December 2021, LIOC gained control of 75 oil tanks in a strategically significant storage facility near Trincomalee.

For China, on the other hand, this crisis presents a precarious situation. While it holds 10% of Sri Lanka’s debt, the perception is that China is one of the key reasons for Sri Lanka’s downfall. With China’s other BRI partners, such as Pakistan, heading towards a similar fate, it is important for China to understand the grip it has in deciding the fate of countries over which it holds such significant power. At the same time, it will not like to lose the control it holds over this region to India that would gladly step in to displace China as the preferred partner.

EOS Perspective

The Sri Lankan crisis and its management is being closely observed by several global economies. While China has been Sri Lanka’s prominent partner over the last decade and a half, a new regime in Sri Lanka, China’s tepid response, and India’s support may lead to a shift in allegiances in the region. However, it is still early to offer any definite comments. China still holds significant influence in the region. This can be seen in the recent events, when in August 2022, China docked its ballistic missile and satellite tracking ship, Yuan Wang 5, (also termed ‘spy’ ship) at Sri Lanka’s Hambantota port for six days, despite significant resistance and raised security concerns by India. Therefore, while India is trying to get closer with Sri Lanka, it is very difficult to match China’s control over the region. That being said, there is definitely an opening to improve both political and business relations with Sri Lanka for India. While politically Sri Lanka is of strong geopolitical significance, the country can also prove to be a valuable economic partner with regards to growing trade as well as large scale power and infrastructure projects in the long run.

by EOS Intelligence EOS Intelligence No Comments

China’s BRI Hits a Road Bump as Global Economies Partner to Challenge It

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In 2013, China launched its infamous Belt and Road Initiative (BRI), which has gone about developing several infrastructure projects across developing and underdeveloped countries across the globe. However, BRI has faced significant criticism as it brought heavy debt for several countries that are unable to pay the loans. Moreover, it is believed that China exercises significant political influence on these countries, thereby building a sort of dominance across the globe. To counter this, several developed economies have come together to launch alternative projects and partnerships that facilitate the development of infrastructure across developing/underdeveloped countries without exerting significant financial and political bindings on them. However, the main aim of these deals seems to be to keep a check on China’s growing might across the Asian and African continent.

Read our previous related Perspectives: OBOR – What’s in Store for Multinational Companies? and China’s Investments in Africa Pave Way for Its Dominance

China’s BRI program has signed and undertaken several projects since its inception in 2013. As per a 2020 database by Refinitiv (a global provider of market data and infrastructure), the BRI has signed agreements with about 100 countries on projects ranging from railways, ports, highways, to other infrastructure projects and has about 2,600 projects under its belt with an estimated value of US$3.7 billion. This highlights the vast reach and influence of China under this project and its growing financial and political power across the globe.

China’s BRI – looked as a debt trap

Over the years, BRI initiative has been criticized for being a debt-trap for developing and underdeveloped nations, by imposing heavy debt through expansive projects over the host countries, the non-payment of which may lead to significant economic and political burden on them. While the USA, the EU, India, and Japan have been some of the most vocal critics of the BRI program, several participating countries now voice a similar message as they have enveloped in high debt under these projects.

In one such example, the Sri Lankan Hambantota Port was built under the BRI scheme by China Harbor Engineering Company on a loan of nearly US$1.26 billion taken by Sri Lanka from China. The project was questioned for its commercial viability from the very beginning, however, given China’s close relationship with the Sri Lankan government, the project pushed through. As expected, the project was commercially unsuccessful, which along with unfavorable re-payment plan resulted in default by Sri Lanka. Thus, in 2017, the Chinese government eventually took charge of the port and its neighboring 15,000 acres region under a 99-year lease. This transfer has given China an intelligence, commercial, and strategic foothold in a critical water route.

In a similar case, Montenegro is also facing a difficult time repaying its debt to China for a highway project under BRI. In 2014, Montenegro contracted with China Road and Bridge Corporation (CRBC) for the construction of a highway to offer a better connection between Montenegro and Serbia. However, the feasibility of the project was questionable. The Montenegro government took a loan of US$1.59 billion (85% of the first phase of the project) from China Exim Bank at a 2% interest rate over the next 20 years. However, the project, which is being undertaken by Chinese companies and workers using Chinese materials, has faced unplanned difficulties in completion, has put significant financial pressure on the Montenegro government. This is likely to further degrade the country’s economy, delay its integration with the EU, and leave it vulnerable to Chinese political influence. While the EU has refused to finance the loan altogether, it is offering special grants and preferential loans to the country from the European Investment Bank to facilitate the completion of the highway.

Moreover, as per a 2018 report by Center for Global Development, eight BRI recipient countries – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan – were at a high risk of debt distress due to BRI loans. These countries are likely to face rising debt-to-GDP ratios of more than 50%, of which at least 40% of external debt owed to China in association to BRI related projects.

Owing to the growing concern over increasing Chinese investment debt, several countries are now looking to reduce their exposure to Chinese investments and financing. In 2018, the Myanmar government, in an attempt to avoid falling deep into China’s debt-trap and becoming over-reliant on the country, scaled down China-Myanmar Kyaukpyu port project size from US$7.5 billion to US$1.3 billion.

Similarly, in 2018, the Malaysian government cancelled three BRI projects – the East Coast Rail Link (ECRL) and two gas pipelines, the Multi-Product Pipeline (MPP), and Trans-Sabah Gas Pipeline (TSGP) as these projects significantly inclined towards increasing the Malaysian debt to China to complete these projects.

China’s long-term ally, Pakistan, also opted out from China’s BRI in 2019, exposing some serious flaws with the project. In 2015, the two countries unveiled a US$62 billion flagship project under BRI, called the China-Pakistan Economic Corridor (CPEC). While it was started with an ambition to improve Pakistan’s infrastructure (especially with regards to energy), this deal resulted in severe debt woes for Pakistan as the nation started to face a balance-of-payment crisis. This in turn resulted in Pakistan turning to International Monetary Fund (IMF) for a three-year US$6.3 billion bailout package. Pakistani officials have even claimed that the CPEC project is equally (if not more) beneficial for China in terms of gaining a strategic advantage over India and by extension the USA. Thus, given its partial failure and increasing financial pressure on Pakistan, many ongoing projects under CPEC have been stalled or being rebooted in a slimmed-down manner.

Similarly, more recently, in April 2021, Australia scrapped off its deal it had with China under BRI, stating the deal to be over ambitious and inconsistent with Australia’s foreign policy.

Developed nations come together to offer alternatives

Given the push against BRI, several developed nations have come out with alternative infrastructure plans, either individually or in partnership with each other. The key purpose of this is to not only offer more viable options to developing and underdeveloped nations but also to keep a check on China’s growing global influence.

In one such move, in May 2015, Japan launched a ‘Partnership for Quality Infrastructure’ (PQI) plan, which came out as a direct competitor to China’s BRI. The PQI Japan (in collaboration with Asian Development Bank (ADB) and other organizations and countries) aimed at providing nearly US$110 billion for ‘quality infrastructure investment in Asia from 2016 to 2020. Although, on one side, this initiative is intended to secure new markets for Japanese businesses and strength export competitiveness to further bolster its economic growth, on the other side, politically PQI is a keen measure to counter China’s influence over its neighboring countries.

Just like Japan, India has also been a staunch critic of China’s BRI as it feels that the latter uses the BRI to expand its unilateral power in the Indo-Pacific region. Thus, to counter it, India, formed an alliance with Japan in November 2016, called ‘Asia-Africa Growth Corridor’ (AAGC).

The alliance aims at improving infrastructure and digital connectivity in Africa and connecting the continent with India and other Oceanic and South-East Asian countries through a sea passageway. This is expected to boost economic collaborations of India and Japan with African countries by enhancing the growth and interconnectedness between Asia and Africa.

The alliance claims to focus on providing a more affordable alternative to China’s BRI with a smaller carbon footprint, which has been another major concern in BRI project execution across Indo-Pacific region. The emphasis has been put on providing quality infrastructure while taking into account economic efficiency and durability, inclusiveness, safety and disaster-resilience, and sustainability. The countries do not have an obligation of hiring only Japanese/Indian companies for the infrastructure development projects and are open to the bids from the global infrastructure companies.

In more recent times, in May 2021, the EU and India have joined hands for a comprehensive infrastructure deal, called the ‘Connectivity Partnership’. This deal aims at strengthening cooperation on transport, energy, digital, and people-to-people contacts between India and the EU and developing countries in regions across Africa, Central Asia, and the Indo-Pacific region. Moreover, it aims at improving connectivity between the EU and India by undertaking infrastructure development projects across Europe, Asia, and Africa. It also focuses on providing a more reliable platform to the already ongoing projects between the EU and India’s private and public sectors.

While the two partners claim otherwise, the deal seems to be their collective answer to China’s BRI and its growing influence in the Asian, African, and European belt. Unlike BRI, the EU-India Connectivity Partnership aims to follow a clear rule-based approach to have greater involvement from the private sector with backend support from the public sector of both sides. This protects the host country against heavy debt and in turn restricts the level of political influence that both sides may have on the host country. This advantage over China’s infrastructure deal makes this project a serious competitor to the BRI in this region as host countries are most vary of falling into a debt-trap with China.

Another recent initiative to dethrone the BRI has been the ‘Build Back Better World’ (B3W), which has been undertaken by the Group of Seven (G7) countries in June 2021. This project, led by the USA, is focused on infrastructure development in low- and medium-income countries, and aims to accomplish infrastructure projects worth US$40 trillion in these countries by 2035. Further, the project is intended to mobilize private-sector capital in areas such as climate, health, digital technology along with gender equity and equality involving investments from financial institutions of the countries involved.

This project claims to be based on the principles of ‘transparency and inclusion’ and intends to cease China’s rising global influence (through BRI) as it aims to make B3W comparatively more value-driven, market-led, and a higher-standard infrastructure partnership for the host country. To ensure inclusivity and success of the project, the USA invited other countries such as India, Australia, South Korea, and South Africa to join the project. However, considering the nascent stage of the B3W development, the proceedings and details of the project are not explicitly clear, however, given that its intention is to help the USA compete with the BRI, it is expected to be well-funded, robust, and inclusive.

EOS Perspective

China’s BRI started on a very high note, garnering multi-billion-dollar infrastructure projects across a host of Asia, African, and European countries. However, over the last couple of years, increasing number of countries have become wary of its inherent problems, such as looming debt, increasing Chinese influence, and incompletion of projects. This has helped shift the momentum towards other developed countries that have for long wanted to counter China’s growing global influence. Using this opportunity, Japan, India, the EU, and the USA have come up with alternative infrastructure deals to compete with the BRI.

That being said, BRI will not be easy to shove aside as China has been in this game for several years now and has a significant time advantage. While countries such as India can try to compete, they do not have the financial might to take up projects that are strategically important and commercially viable.

Further, several of the alternative projects, such as India-EU Connectivity Partnership and G7 B3W aim to significantly involve the private sector for investments. While this is good news for the host countries where the project will be undertaken, private players will definitely be more concerned about financial viability of their investment and may not be able to match the BRI investment values, debt rates, etc. Moreover, geographic location puts China in an advantage for projects in the Asian region (when compared with the USA and the EU).

Therefore, while the attempt to dethrone China’s BRI has gained significant momentum and found proper backing, it is something that cannot happen in the short term. However, given the growing anti-China sentiment, it can be expected that with the right partnerships and project terms, BRI may start facing some serious competition from global powers across the globe.

Europe Fights Back to Curb China’s Dominance
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Europe Fights Back to Curb China’s Dominance

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Given the swiftness of China’s economic development in the past three decades, transitioning from an impoverished and insular country to one of the formidable economic powers of the world, it has taken some time for Europe to accept China’s growing power and influence. Not only does China sit on largest currency reserves worldwide, but it has also become a significant provider of foreign investments, including in EU nations. This has recently strengthened China’s influence over the EU, which has created a sense of caution amidst European policymakers.

How is Europe benefiting from China’s growing investments?

Europe-bound Chinese investments were six times higher than Chinese investments in the USA – in H1 2018, Chinese investments in Europe stood at US$ 12 billion as compared to US$ 2 billion in the USA. For some of the economically struggling EU countries, Chinese investments are critical for developing and upgrading infrastructure, including energy plants, railways, motorways, and airports.

China’s Belt and Road initiative, under which cross-border infrastructure will be developed, will reduce transportation costs across Europe and China, creating an opportunity to facilitate trade expansion, regional integration, and attract foreign investments.

Besides infrastructure development, the investments are likely to create job opportunities and enhance economic competitiveness across Europe.

Then why is China’s growing influence alarming Europe?

Europe now sees a range of threats that China’s rising dominance in the region could bring along. Recently, the European Commission labelled China as economic competitor seeking technological leadership and systemic rival encouraging alternative models of governance. Europe realizes that China pursuits to shape globalization to suit its own interests.

The EU is deeply concerned regarding China exercising divide and rule tactics to strengthen its relationship with individual member countries that are susceptible to pressure, which could eventually harm the European cohesion. Recently, Italy signed the Belt and Road initiative, a landmark move against the counsel of western European nations, such as France and Germany, thus, raising questions on cohesion of EU countries.

The other concern is China’s rising influence over key governments of EU nations, thus, empowering itself with political leverage across the continent. China has already yielded political returns by wearying EU unity, particularly, when it is related to European policy on international law and human rights. In 2017, Hungary broke EU’s consensus by refusing to sign letter on human right violation against China. During the same year, Greece blocked an EU statement, which condemned China’s human rights record, at the UN human rights council.

Besides politics, China has also spread wings across key sectors of economy such as infrastructure, high-end manufacturing (including critical segments such as electronics, semiconductors, automotive, etc.), and consumer services, among others – growing dominance of China across these sectors is another cause of worry for the EU.

Europe also condemns China’s discrimination against foreign businesses, rendering limited market access to European firms and employing a non-transparent bidding processes. European firms operating in China face several trade and investment barriers such as joint venture obligations and discriminatory technical requirements that entail forced data localization and technology transfers. On the other, European markets have been open to foreign investments leading to massive Chinese FDI. However, lack of reciprocity harms European interest and could lead to unfulfilled EU-China trade ties.

The EU also criticizes China’s Belt and Road project for its lack of respect for labor, environment, and human rights standards. Other concerns include non-transparent procurement procedures with majority of contracts being awarded to Chinese companies without issuing public tenders, meagre use of domestic labor and limited contractor participation from host country, and use of construction materials from China – all of which undermine Europe’s interests.

Europe Fights Back to Curb China’s Dominance

How is Europe responding to China’s actions?

Europe is adopting strategies to limit China’s influence and reach across Europe and beyond, in African and Pacific countries.

Development of EU-Asia Connectivity Strategy

The EU’s new initiative, EU-Asia Connectivity Strategy, is an implicit response to China’s Belt and Road initiative, signifying a crucial first step to promoting European priorities and interests in terms of connectivity. The initiative aims to improve connectivity between Europe and Asia through transport, digital, and energy networks, and simultaneously promote environmental and labor standards.

The EU’s initiative emphasizes sustainability, respect for labor rights, and not creating political or financial dependencies for the countries.

Robust FDI screening process

European nations have been increasingly alarmed due to state-owned Chinese companies acquiring too much control of critical technologies and sensitive infrastructure in the continent, while China shields its own economy.

For the same reason, EU parliament is developing an EU-level screening tool to vet foreign investments on grounds of security to protect strategic sectors and Europe’s interests. The regulation will protect key sectors such as energy, transport, communication, data, space, technology, and finance.

While the EU still remains open to FDI, the regulation will protect its essential interests. Nonetheless, stringent investment screening procedures are likely to limit foreign investments in the continent, particularly from China.

Tackling security threat posed by China

In March 2019, the EU Parliament passed resolution asking European institutions and member countries to take action on security threats arising from China’s rapidly rising technological presence in the continent.

The resolution is likely to impact the ongoing debate of whether to eliminate China’s Huawei Technologies from building European 5G networks. The EU is concerned that the Chinese 5G equipment could be used to access unauthorized data or sabotage critical infrastructure and communication systems in the continent.

To minimize dependence on Chinese technology firms (such as Huawei Technologies), EU countries would need to diversify procurement from different vendors or introduce multi-phase procurement processes.

EU countries expanding footprint to counter China’s reach

Since 2011, China has invested US$ 1.3 billion in concessionary loans and gifts across the Pacific region, and has established its supremacy by becoming the second largest donor. China has been trying to build its influence, as the Pacific is bestowed with vast expanse of resource-rich ocean and the regional countries have voting rights at international forums such as the United Nations.

To counter China’s reach and ambitions across the Pacific countries, European nations such as the UK and France plan to open new embassies, increase staffing levels, and engage with leaders in the region. The UK plans to open new high commissions in Vanuatu, Tonga, and Samoa by the end of May 2019 and France is looking to meet and engage with Pacific leaders during the year.

Investment in Africa to limit China’s influence

As a strategy to curb China’s growing influence, the EU plans to deepen ties with Africa by boosting investment, creating jobs, and strengthening economic relations. The plan is to create 10 million jobs in Africa over the next five years. Europe is also aiming to establish free trade agreement between the two continents.

In recent times, China has been blamed of neo-colonial approach towards Africa, which is aimed at emptying the continent of its raw mineral in exchange for inexpensive loans, extensive but inferior infrastructure, among others. Europe aims to curb such influence by attempting to do business ethically. 

EOS Perspective

Unnerved by flurry of Chinese investments in the continent, the EU is looking to regain its control over matters. Europe has adopted a defensive approach against China’s initiatives, reflected through measures taken to protect critical sectors using investment screening system. The EU understands the downsides of enormous Chinese investments/loans, which may seem hugely enticing in the beginning, but could saddle vulnerable countries in debt they cannot repay – for example, a Chinese-built highway in Montenegro is likely to increase the country’s debt to about 80% of its GDP.

Currently, the key issue is the fact that Europe is standing divided on the right strategy to respond to bolder and ambitious China. While countries such as Germany, France, and UK have grown skeptical of China and are revolting against it, Italy, Hungary, Portugal, Greece, among others, are generally China-friendly. Europe has certainly become stern and tougher on China, but cannot pursue its interests without standing united.

The current situation does not demand Europe opposing China outright, but rather ensuring fair business conditions and equal market access through dialogue and cooperation with China.

Nonetheless, the EU has been quite slow to wake up to the various challenges that excessively ambitious China brings to the table. However, if Europe is able to become united now, there is still a chance to build a decent Sino-European partnership that serves interests of both parties.

by EOS Intelligence EOS Intelligence No Comments

China’s Investments in CEE: Sharing Benefits or Building Own Dominance?

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In 2012, China unveiled its plan to invest in Central and Eastern European Countries (CEECs) through transregional platform called the 16+1 Cooperation framework. Since the launch of this framework, China has been proposing various policies of mutual benefit, making efforts to become an important trade and economic partner of the CEECs.  While investments are welcome, several EU leaders and political experts in the region criticize such deals. They point at a threat of China’s growing dominance in the CEECs, as well as at China not keeping its promises made during the launch of this framework and negotiations of various deals.

China promises mutual benefits

The 2008 crisis brought worsened economic conditions to the CEECs, which have since been seeking capital to stimulate investment and facilitate higher economic growth, along with expanding exports beyond traditional European destinations.

Owing to China’s position as one of the largest economic power houses and due to the CEECs’ high trade deficit with China, the countries in this region showed interest in Chinese investments and opened their doors for potential avenues to increase trade with China. China too has looked for diversifying its export destinations and expanding its brands internationally, and CEECs could help it achieve just that. Chinese motivation to focus on CEECs has been fueled by two key factors: availability of skilled and cheaper workforce in CEECs (as compared to EU average) as well as China’s desire to gain stronger strategic influence in business and politics arena in the region as against the EU and Russia.

In this mutual interest, China and the 16 countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia) signed a framework named 16+1 Cooperation in Warsaw in 2012. At the outset, this framework aimed at deepening the multi-lateral economic ties, intensifying infrastructural and cultural cooperation, and capitalizing on the emerging business opportunities for both China and the CEECs.

The scope of cooperation was set to cover projects in CEECs’ infrastructure through investing in transportation systems by establishing new rail routes connecting the 16 countries with other parts of the world (Asia, Africa, and Middle East). China also intended to focus on capitalizing on green technologies, expanding export and import of goods, bringing new technologies for manufacturing sector, enhancing exchange programs for science, architecture, literature etc., and improving cross-cultural relations with the 16 countries.

Framework institutionalization raises a few eyebrows

In order to execute all the cooperation plans, the institutionalization of this framework in the CEECs became the first task to accomplish. It began with launch of Permanent Secretariat at the Chinese Foreign Ministry in China in 2012, followed by opening of Business Council in Poland (2014), Secretariat of Investment Promotion in Poland (2014), New Silk Road Institute in Czech Republic (2015), Center for Dialogue and Cooperation on Energy Projects in Romania (2016), Regional Center of the China National Tourism Administration in Hungary (2016), Coordination Mechanism on Forestry Cooperation in Slovenia (2016), Association for the Promotion of Agricultural Cooperation in Bulgaria (2017), China-CEE Institute in Hungary (2017), and few more.

Such institutionalization in the form of CEECs national coordinators, establishment of several secretariats, and a number of associations and industry organizations for individual states, became a crucial step towards enhanced political and economic relations of China and CEECs, and paved the way for further projects.

On the other hand, however, it left room for criticism. Some organizations, such as Institute for Security and Development Policy, Sweden, pointed out that establishing these institutions in a scattered rather than centralized way will deeply affect proper coordination and flow of information about all projects and initiatives within the framework.

Other voices of criticism, mostly from EU diplomats, warned about the fact that these institutions will limit accessibility to the information for the public. These institutions tend to work in line with the Chinese culture which differs greatly from cultural norms in European (and thus CEECs) organizations. In CEECs’ political culture (prevalent to various degrees across the European region), institutions are expected to actively and symmetrically communicate information to the public, providing room for public criticism and ensuring transparent procedures.

However, in Chinese political culture, public consultation and individual opinion are not given such importance. This leaves many EU leaders to ponder whether China’s intentions are to actually enhance the Sino-CEECs relations or to grow its dominance over the CEECs and act as it pleases behind the veil of its own culture providing an excuse for limited transparency.

OBOR and 16+1 framework go hand in hand

One of China’s major initiatives (and perhaps the only one so far considered to bring real benefit for both sides) is the One Belt, One Road (OBOR) project, launched in 2013 (we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017). Under this project, China is ambitiously investing in developing one road connectivity, and this plan includes connecting the 16 CEECs with Asia, Africa, and Middle East. According to National Development and Reform Commission of China, Chinese investment in OBOR is likely to reach anywhere between US$120 billion and US$130 billion and with the external investments, it is expected to be totaling to US$600-800 billion by 2022. The success of OBOR is likely to impact the economies of CEECs though increased trade not only with China but also with other countries in Asian Pacific region.

China’s Investment in CEE Sharing Benefits or Building Own Dominance

The Balkans remain important in China’s plans

As part of OBOR, China has increased investment in infrastructure development in CEECs countries, with the initial focus on a few Balkan projects, especially in Serbia, with which China have always had excellent bilateral relations. The country appears to be the central hub in the Balkans for OBOR, both at an infrastructural and political level.

China started with a couple of agreements for infrastructure development with Serbia. These included China’s first large infrastructure investment in the region – construction of “Mihajlo Pupin”, the second bridge over Danube River in Belgrade in 2014 by China Road and Bridge Corporation (CBRC). The bridge shortened the travel time between Zemun on the south bank and Borca on the north bank of the Danube River from more than an hour to just 10 minutes. It also considerably reduced traffic problem on the first bridge. The project was received well by Serbia and taken as a good sign of China’s efforts to strengthen relations between the two countries.

China and Serbia came together for three more deals under the 16+1 framework, leading to total Chinese investment of nearly US$1.06 billion. These included US$715 million for construction of Kostelac power generation unit and expansion of coal-fired plant complex started in 2013, another US$350 million for re-construction of 34.5 km long segment of Belgrade-Budapest railway line, started in 2014, and undisclosed-value project of construction of Surcin-Obrenovac segment on Serbia’s E763 highway developed by China Communication Construction Company (CCCC) in 2017. All the three projects are likely to be completed by 2020.

Another flagship project, which involved Serbia and Hungary, was the construction of China-Europe land-sea fast intermodal transport route that was initiated in 2014 and became operational in 2017. With these infrastructural developments, China showed it delivered on its promises, and took steps to facilitate an enhanced exchange of goods with the CEECs.

Asymmetrical distribution of opportunities also causes criticism

The fact that all these projects were developed predominantly by Chinese firms, has been a cause for concern for western European leaders who criticized Chinese companies for seizing all opportunities and profits. The critics point out that if China and CEECs are coming together for such projects, the local companies should be able to benefit and be given opportunity to contribute skillset and technologies to local infrastructure development.

On the other hand, according to numerous experts, several countries, including Serbia, lack the technical and financial capacity required for such projects. China’s perspective should also be considered here – as China is already investing in the CEECs in the development of infrastructure, it is only logical (and natural) that it would prefer to engage own firms in order to help their business and take back some revenue from the projects.

China strengthens its foothold through financing initiatives

Chinese investments in CEECs are not only limited to the infrastructure sector, but also include certain financing initiatives in the form of availability of loans and funds. During the launch of 16+1 Cooperation framework, China announced a special credit of US$10 billion to the 16 countries to be used as preferential loans for implementation of common projects. Apart from that, in 2013, China together with CEECs launched a Sino-CEE investment fund of US$435 million, which aims at contributing financially to the sustainable economic development of CEECs.

Further, various banks and financial institutions, such as Bank of China, China Development Bank, China Export-Import Bank, and Industrial and Commercial Bank, have opened their branches in the region. While the official reason for this was to provide financial support and availability of funds to the CEECs, a relevant reason was also for China to expand the reach of these financial institutions’ brands in the European market.

Chinese investments grow in size and breadth

It is clear that China’s interest in CEECs has been growing, as exhibited through the sectoral breadth of investment initiatives and the variety of investment modes. Chinese companies are also pursuing the path of acquisitions and joint ventures with CEECs-based companies, the key example of which was seen in 2016, when Polish waste management firm, NOVAGO, was acquired by China Everbright International (Hong Kong). The deal was signed up at a value of US$144.3 million and was one of the largest acquisitions by a Chinese firm in the environment sector in CEECs.

While it is expected that such acquisitions can certainly bring benefits to the local entities involved in the deal (through capital and technology transfers, and easier access to the Chinese market), some concerns have been raised that an intensive Chinese-dominated M&A activity is not healthy for the local market dynamics.

The extent of these investments and acquisitions resulted in year-on-year increase in China’s outward foreign direct investment (OFDI) stock in the 16 countries. According to data from the Chinese Ministry of Commerce, the OFDI stock in 2010 in CEECs was estimated at US$0.85 billion and it reached US$1.97 billion in 2015, depicting an overall increase of around 130% in five-year period. Overall, Hungary was the leading recipient of FDI in CEE region with US$571.1 million, followed by Romania with US$364.8 million, and Poland with US$352.1 million in 2015.

The increased FDI in these countries is partially also a result of their interest in attracting Chinese investments even before the 16+1 cooperation framework came into picture. Poland, for example, being the largest economy amongst CEECs, started promoting itself with Chinese firms since the EXPO 2010 in Shanghai. For long, Hungary seems to have made a point to maintain good relations with China, even before other CEECs intensified multilateral relations with China. Hungarian government also made efforts to attract FDI, including from China, by proposing deals such as introduction of special incentives for foreign investors from outside EU or residence visa programs for bringing in a certain level of investment in Hungary.

Trade intensifies, though less than expected

Not only has there been growth in Chinese FDI since the yearly 2010s, but also the trade between China and the CEECs has grown progressively. According to Department of European Affairs at China’s Ministry of Commerce, trade between CEECs and China was estimated at US$43.9 billion in 2010 and grew to US$68.0 billion in 2017, showing a growth at a CAGR of 6.5% during 2010-2017.

While this might seem impressive, it must be noted that at the time of the launch of 16+1 cooperation framework, China promised to increase the trade value to US$100 billion by the end of 2015, which is far from the actual results even by the end of 2017. This again led to the criticism by the western European leaders over China’s ability (and willingness) to deliver on its promises, indicating lack of credibility in Chinese assurances.

On the other hand, the numbers do depict growth in trade between China and CEECs from 2010 to 2017 as compared to the previous years. According to Chinese Ministry of Commerce, China exports to CEECs were US$49.4 billion and imports from CEECs were US$18.5 billion in 2017, with an increase of 13.1% and 24%, respectively, from 2016. China’s exports to CEE concentrate on technology (with high-tech products from telecommunication, service sectors, and e-commerce sectors). CEECs supply agricultural products including fruit, wine, meat, and dairy products to meet the growing demand of the large population of China. Further interest in expanding imports of agricultural and dairy products by China can be expected, and an increased ease of exporting to China is likely to help CEECs to reduce their continued trade deficit in the coming years.

EOS Perspective

The rising investments of China in the CEECs have been under scrutiny since formalizing the 16+1 cooperation framework in 2012. Ever since the launch, China has been taking a range of initiatives that on the one hand worked towards development of the CEECs, but on the other hand gradually built its dominance in various markets and sectors in the region.

It is clear that such steps are taken by China in order to strengthen its political and economic foothold in the region. European leaders continue to remain skeptical over the intentions of China, which might also indicate the EU’s insecurity about China capturing strong hold over CEECs markets and building its dominance, which potentially might be able to overpower the EU’s influence in the region (especially in the Balkans out of which several countries are not EU members).

From the development point of view, initiatives such as OBOR, China-Europe sea-land express way, Belgrade and Budapest railway line, and even the mergers and acquisition deals, certainly bring advantages not only for China but for the CEECs as well, through much needed funding of infrastructure projects as well as through increased trade revenue.

Although it is of paramount importance for European watchdogs to keep an eye on the ongoing trade imbalance and growing Chinese ownership in CEE enterprises, it must be noted that acquisitions of CEECs-based firms by Chinese firms have largely affected the business in a positive way till now, thanks to influx of capital and the possibility to get the base to expand in Asian markets. Under this framework, despite its inherent issues and associated risks, steps taken by China for future development in the form of ongoing projects, especially in the infrastructure sector, have the potential to create more opportunities for the parties involved to strengthen cross-regional trade and hence create a (almost equal) win-win situation for both China and the CEECs.

by EOS Intelligence EOS Intelligence No Comments

China’s Investments in Africa Pave Way for Its Dominance

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Connecting nearly 70 countries through an extensive land network and sea routes across Asia, Europe, and Africa, the One Belt, One Road (OBOR) Initiative is the focal point of China’s foreign policy that is publicized as providing various economic developmental opportunities. Proposed by China’s President, Xi Jinping, in September 2013, the action plan and framework of the OBOR, also known as Belt and Road Initiative (BRI) was officially presented in March 2015. Since the unveiling, the initiative has gained huge momentum in certain parts of the world. Africa is one such region that has witnessed major infrastructural development across road and rail network, telecommunication, and energy sectors in the early stages of BRI.

Africa is keen on receiving investment from China to boost its economic development. Owing to its location, the continent, as such, is placed perfectly on the sea route as part of China’s global plan. Although the continent lies on the Maritime Silk Road, the sea route that connects Indian Ocean to Suez Canal via Red Sea, only few African countries are of direct strategic importance to China along the OBOR route (including Egypt, Kenya, Tanzania, Ethiopia, and Djibouti). However, in its growth strategy, China is involved in several projects to increase its presence across other African nations as well.

Focus on strategic sectors

China is focusing intensely on infrastructure projects in the initial years of this initiative, as strengthening the railway and road network across the countries and developing sea ports is crucial for the success of the project. However, the expansion plans are not only limited to logistics. China is also investing heavily in other sectors, such as energy, mining, and telecommunications.

China’s Investments in Africa Pave Way for Its Dominance

Logistics and industrial zones

China is involved in a number of mega infrastructure projects in Africa. Railway projects rolled out by Chinese companies across Africa are amongst the ones (along with road network and sea ports projects) that have gained momentum in terms of execution and become operational ahead of scheduled time. The Mombasa-Nairobi Standard Gauge Railway (Madaraka Express) in Kenya at a cost of US$3.2 billion, built by China Road and Bridge Corporation (a Chinese state-owned construction and engineering company) and funded by China Exim Bank (90% funding by the bank and remaining 10% by Kenya government) connecting Mombasa to Nairobi, became operational in June 2017 (construction of the railway line began in January 2015) as against the timeline of four years. In due course, the line will link Tanzania, Uganda, Rwanda, Burundi, and South Sudan to Ethiopia’s Addis Ababa Light Rail Transit (AA-LRT) built by China Railway Group Limited, a Chinese construction company. Initiatives such as this, when married with port connectivity across sea-based countries, will not only improve trade amongst nations within the continent but will also boost Africa’s commerce market by opening new trade routes with other continents.

Some of the railway projects initiated by China were planned long before OBOR came to play, however, they could still form a crucial part of the initiative. For instance, the Tanzania-Zambia railway line built in 1970 with the technical and financial aid from China, is now being revived again with the help of Chinese companies Plans are underway to link it with other ports and build an industrial economic belt along the railway line to utilize the line more effectively. Chinese government has given Tanzania-Zambia Railway Authority (TAZARA) a US$22.4 million interest-free loan to not only improve the operations but also to extend the line to other countries that include Malawi, the Democratic Republic of Congo, Rwanda, and Burundi. This line is of strategic importance to China in terms of better connectivity, which could lead to improved trade partnerships in the future, as this is the only railway line in Africa that connects three economic blocs, namely East African Community, Common Market for Eastern and Southern Africa (COMESA), and Southern African Development Community (SADC).

China is effectively planning for future stability of its position in the continent, as evident from its plan to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent.

China is effectively planning for future stability of its position in the continent, as evident from its 2016 announcement to build Africa’s largest free trade zone in Djibouti, considered as China’s gateway to the continent, spread over an area of 48 sq. km. The port will be built by Dalian Port Corporation Limited, Chinese largest port operator, and is expected to handle US$7 billion in trade within two years of becoming operational. About 15,000 direct and indirect jobs are expected to be created from the project. Strengthening Djibouti air transport sector is also of crucial importance to China and in light of this, two new airports – Hassan Gouled Aptidon International Airport and Ahmed Dini Ahmed International Airport – are also being set up to boost connectivity between the two countries. Funded by the China Civil Engineering Construction Corporation (CCECC), a Chinese construction engineering company, at a combined cost of US$599 million, this paves way for the country’s economic growth and development by making it a trade hub.

Telecommunications

China Communications Services Corporation Limited (also known as China Comservice), a subsidiary of China Telecommunications Corporation, is planning to revamp the original Africa Information Superhighway to Trans Africa Information Superhighway, an information and communication technology (ICT) project. The 20,000 km long optical cable is expected to pass through 48 African countries and involves an investment of US$10 billion. With growing internet penetration in many African countries (as per World Bank report, Kenya had an internet penetration rate of 45.6% in 2015 which was above the world’s average of 44%), the ICT project offers huge potential.

Mining and energy

China has already been heavily investing in energy, power, and mining sectors in Africa as part of its FDI policy, and now under the OBOR initiative the investments are expected to rise further. China General Nuclear Power Holding Corporation (CGNPC), a Chinese player that develops, constructs, and operates power plants, started mining uranium in the western-central part of Namibia in 2016. Known as the Husab Uranium Project or Husab Mine, it is amongst China’s largest projects in Africa, and has received investment worth US$2 billion, expected to produce 6.8 million kilograms of uranium oxide every year.

Although China has been investing in Africa for development of renewable energy projects, China’s focal point on the energy and power sector under OBOR initiative is still diluted. However, investments across this sector can be expected to happen in the near future owing to abundance of natural resources in the continent.

EOS Perspective

China’s OBOR initiative seems to be successfully transitioning from a theoretical plan to reality, at least within African continent. It provides developing countries across Africa what they need the most – infrastructure (roads, railways, sea ports, airports, power plants, refineries) along with supporting various other sectors such as information technology, telecom, and financial services. Apart from streamlining infrastructural development in Africa, African countries can also benefit in terms of better trade within the continent as China plans to build high speed rails, ports, and roads across the continent as indicated in the memorandum of understanding (MoU) with the African Union (AU), signed in 2015. Though this means some good news in terms of job creation, infrastructural development, and overall growth, African nations need to strategically think and analyze how they can emerge truly stronger in the run for economic development, without the threat of being increasingly dominated by the Chinese influence.

Projects undertaken as part of OBOR are of great size and offer growth opportunities, but also involve large amount of investment, long periods of construction, and associated operational risks – we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017. African domestic stakeholders should wisely chalk out their approach tactics and secure participation in implementation plans when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits. Governments and local leaders of each African country will have to play an active and important role in negotiating and finalizing business terms with Chinese companies, if they want these partnerships to benefit their country and local population in the long run.

African stakeholders should secure participation when partnering with Chinese companies, in order to favor their own economic and sustainable development as well as share in benefits.

While it cannot be denied that African countries are surely bound to benefit from the OBOR initiative, it is the Chinese companies leading these projects that will reap the largest benefits as well as China that will intensify and strengthen its economic hold in the region. Starting off with successful road and railway projects in Africa, Chinese companies are going to focus on sectors such as manufacturing and real estate in the coming years. Presence of natural resources in the continent is also likely to attract Chinese players in the mining sector. And with so much investment already happening in the initial phase of OBOR, Chinese players are planning for the long haul by developing large industrial zones to avoid issues related with labor costs and tariffs.

This sudden inclination of China towards developing and helping African nations seems overwhelming. It draws attention to the fact that China may try to overpower and dominate the economic and geo-political scenario across Africa in disguise of offering the countries development opportunities. With easy loans, with no stringent clauses related to intellectual property, legal matters, and human rights policies, all of which are conditions far more attractive than those that would be offered by China’s Western counterparts, China makes sure to have an upper hand in all the projects that are undertaken as part of the OBOR initiative.

With loans from Chinese banks and projects led by Chinese companies, there is no doubt that the Chinese influence in the continent is already on the rise. While the immediate effect of growing Chinese dominance in Africa will first be realized in the countries that fall directly on the OBOR sea route (or are easily connected to these sea routes via road and rail), other regions, that are currently not on the OBOR map, are highly likely to also witness the rising control of Chinese companies in less than a decade.

It is also being speculated that if Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies, leaving no room for African players to grow. This could lead to exploitation of African players by the Chinese side, local governments finding themselves under huge debt with Chinese banks hampering plans for domestic development, and leaving local people to deal with meaner jobs as all the high paid jobs would be retained with the Chinese – these are just a few of possible immediate repercussions, but the list might not end here.

If Chinese investment continues to grow at this speed, it can be expected that in relatively near future many sectors will be dominated by Chinese companies.

A drive such as OBOR definitely seems to greatly contribute to putting the African economy on a growth path by pouring the much needed billions of dollars to link China’s trade route to African countries through a strategized set-up of railways, roads, sea ports, and airports thus opening doors for investment in other sectors as well. In the short term, it is clear that African countries have more to gain than to lose when receiving huge investments from China as this drives the continent towards economic prosperity. But China’s intentions behind investing in developing African economies, under the disguise of OBOR initiative, might be more than meets the eye. In the long run, Africa’s economic scene may be China-dominated, not only reshaping the continents’ infrastructural and business scenario, but also initiating a new phase of globalization and development, which most of the African nations have been void off for a long time.

Amid these discussions of the extent to which African nations will let China take control in the name of growth, one thing is clear that China is a strong ally for African nations and the association can only be expected to strengthen under OBOR. Both China and Africa stand to gain from this association – China to notch up a step to reach its goal for global expansion by leaving an imprint on the continent that will be clearly visible for decades to come, and Africa, with regular investment from China, to work on the development and economic upliftment of the continent.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Truck Drivers’ Strike amid Brazil’s Recovery from Recession

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In May 2018, Brazil witnessed a nationwide strike conducted by 200,000 truck drivers, which managed to paralyze the entire country for over 10 days and caused major issues such as shortage of food, death of poultry, and unavailability of public transport, among others.

In 2017, Brazil’s Oil and Gas Company, Petrobras, tied its fuel prices to float with international prices. This was following years of being exposed to high prices paid by Petrobras for refined fuel in international markets and the company’s inability to pass on these higher costs onto the customers domestically, due to existing price controls. The decision to float the domestic prices was further sealed by Petrobras’ attempt to seek recovery of profits after the company’s share prices fall due to a corruption scandal.

The floating price mechanism brought an increase in domestic fuel prices, which greatly affected truck drivers whose earnings were gradually slashed, in a scenario where the Real, Brazil’s official currency, weakened by 17% against the US dollar between May 2017 and May 2018. As a result, truck drivers decided to take their demands for a fuel price control policy to the streets, paralyzing many activities and sectors of the Brazilian economy, and exposing some of Brazil’s main weaknesses.

Brazil greatly depends on the truck industry for distribution

The strike caused substantial fuel shortage as oil trucks were not delivering petrol to gas stations, which affected delivery of other goods across the country. Subsequently, disruption in the distribution of food and other products translated into a visible shortage of items on supermarket shelves and a general hysteria that made people over-purchase what was left. The strike also exposed Brazil’s over-dependency on road distribution system for various sectors to operate (instead of using a balanced mix that would include other means of transport, e.g. cargo trains). Most importantly, the strike, in which truck drivers blocked main road arteries within the country’s 19 states, caused great losses, including (but not limited to) US$826.8 million worth of poultry during those 10 days.

After several attempts by the Brazilian government to reach an agreement with truck drivers, both parties settled to pause the strike – initially for 15 days although now for unlimited time, despite truck drivers’ reservations about the government eventually meeting their demands. The potential of the strike being resumed is still looming on the horizon of the Brazilian economy. The persistence of this conflict and the threat of a longer strike could lead to longer interruption of businesses and industrial activities, which is detrimental for a country that is recovering from one of its deepest recessions of 2015-2016.

Consumers’ purchasing power and confidence may decline

Consumers’ purchasing power is expected to slightly decline due to price increase after the temporary food shortage. According to the price index released by the FIPE (Economic Research Institute Foundation) during the strike, general food prices rose by 1.82%, resulting in a 0.62% increase above what was expected when compared to the same period of 2017. Price of half-finished goods (e.g. poultry) rose by 8.43%, while dairy products prices increased by around 5.85%. In some cases, such as with potatoes, the price increase was of 50.3%. Further, a spread hysteria among consumers led to over-purchasing of products, even at a higher value, meaning Brazilians’ disposable income was reduced for the month of May.

Inflation in May reached an unexpected 3.22%, an atypical increment for a month with usually low inflation rate. In a country overcoming a two-year deep economic recession, uncertainty about food availability and low disposable income have affected consumers’ confidence, which has fallen 4 percentage points in June, potentially translating into reduction of expenditures and hindering Brazil’s economic growth.

Investors’ trust may also fall

The 2015-2016 recession weakened local demand, however, Brazil managed to register a trade surplus and a low account deficit due to positive exports volumes and foreign direct investments (FDI) entering the country. Since the government and the truck drivers are still in talks to reach an agreement, the threat of another strike of similar nature is real. Experts agree that investors may become wary and cease to invest further, if political unrest and economic instability were to continue in the country. As a result, Brazil may not be capable of improving, or even maintaining, its low deficit in the account balance. In 2017, investments reached US$70.3 billion and, before the strike happened, experts believed FDI would register US$80 billion in 2018.

Brazilian president, Michel Temer, offered Petrobras US$274 million as compensation for losses it would incur by cutting oil prices. Though this may offer a 60-day solution to the worried truck drivers, it is only a short-term compensation which Brazil does not plan on extending forever.

EOS Perspective

It should come as no surprise that the strike was conducted only a few months away from Brazil’s presidential elections. Analysts believe it to be a strategy to weaken the image of president Temer, and shed some positive light on the Worker’s Party, of which Lula Ignacio Da Silva, former Brazilian president, is a current member. Despite Lula’s conviction in January 2018 for corruption, its party requested Brazil’s Supreme Court to grant a “suspensive effect” to the conviction, which would eventually allow him to run in the next presidential elections.

Regardless of who will be elected president, the strike has certainly stirred the economic and political scene, and has uncovered several of Brazil’s vulnerabilities.

by EOS Intelligence EOS Intelligence No Comments

Infographic: China Going Cashless – What Does It Mean for Consumers, Trade, and Economy?

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China is heading fast towards a cashless society. The immense adoption and use of smartphone apps that provide mobile-payment services for buying goods and services have transformed how payments are made, eliminating the need to carry cash and reducing the dependence on credit and debit cards, which are already close to scarce in China. Easy access to smartphones and lack of alternative non-cash payment options, low penetration of credit cards and tedious debit card payment process that includes authentication via messages and codes, have led to the growth of online payments in the country.

This cashless payment revolution is expected to continue and grow, thus impacting the way businesses function, consumers shop, and China’s economy rolls.

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