In January 2017, the Chinese-built 728-km Ethiopia-Djibouti electric train was completed. The joint venture between China and Djibouti cost $4 billion, which was financed by China. Djibouti also partnered with China’s state-owned China Merchants Ports Holdings Company or CMPort to build the Doraleh Multipurpose Port. CMPort was the same state-owned corporation that built and financed the Hambantota port in Sri Lanka. Recently, Guelleh announced the new Djibouti International Free Trade Zone, a $3.5-billion venture with China, as a “hope for thousands of young jobseekers.” But while it might provide jobs for the 800,000 Djiboutians, the costs add up to the skyrocketing public debt, which accounts for 88% of the country’s $1.72 billion GDP, of which China owns a large portion. And the question is: How will Djibouti repay the humongous loans from China?
Djibouti’s unfortunate debt trap could result in giving control of these projects to China just like what happened to Sri Lanka who was forced to turn over control of the Hambantota port to the Chinese. Sri Lanka racked up a debt of more than $13 billion to Chinese state-owned banks. These banks charged predatory interest rates as high as 7%, which is too high to service. Eight out of the 68 countries involved in China’s One Belt, One Road (OBOR) Initiative are facing unsustainable debt levels.
Some10,000 miles east is another country that is at risk of falling into China’s debt trap – the Philippines. During his state visit to the Philippines last November 2018, Chinese President Xi Jinping and his Philippine counterpart Rodrigo Duterte signed 29 agreements that include the following: Cooperation on the OBOR Initiative; Joint Oil and Gas Exploration and Development; and Infrastructure cooperation program between the Philippines and China.
With China’s high interest rates, the Philippine government’s debt of approximately $123 billion could rise to over $1 trillion in 10 years. Given the humongous loans that the country gets from China, what’s the likelihood of China taking possession of Philippine assets if she defaults on her loans? There are lucrative assets that China could take over such as the oil-rich Recto Bank, Benham Rise, Malampaya gas field, Clark and Subic Bay Freeport Zones, Port of Manila, Port of Cebu, mining companies, and others.
It’s interesting to note that infrastructure projects are usually debt traps if the debtors don’t have the ability to service the loans due to inadequate revenues. Take the case of the Marcos administration where it embarked on a rapid infrastructure program in the 1980s. I remember going to a trade show at the Philippine Trade Training Center in 1985 and was shocked to see the place virtually empty except for a few cottage industries and processed food products for local consumption. There were no exportable products except for rattan furniture. The Philippines at that time was strapped for dollars due to poor export market and lack of revenue-generating manufacturing industries.
It is evident that China’s playbook is to liberally lend loans to underdeveloped countries at high interest rates. When the countries default on their loans, China would then foreclose the collaterals, which usually translate to 99-year lease agreements as in the case with Sri Lanka, Djibouti, Pakistan, Tajikistan, Kyrgyzstan, Laos, Mongolia, Montenegro, and the Maldives.
Recently, a news report said that a former chief of the Philippine Navy warned over two Chinese firms’ possible takeover of the Hanjin Heavy Industries and Construction (HHIC) shipyard in Subic, Zambales. “Let’s be aware that this Hanjin shipyard issue is not just about business, financial and other economic issues. This is a very significant national issue!” former Navy chief Vice Admiral Alexander Pama said in his Facebook post. He warned that China’s ownership of Hanjin’s shipyard would give unlimited access to one of the Philippines most strategic geographic naval and maritime asset. He then urged both government and private sector to go against China’s possible ownership of the shipyard.
Subic Bay was once the home to one of the largest US naval bases. It served as a repair and supply depot due to its strategic location. It was around 260 kilometers from the Scarborough Shoal, the subject of territorial dispute between the Philippine and China. When the Military Bases Agreement (MBA) between the US and the Philippines expired in 1991, attempts to extend the life of MBA failed in the Philippine Senate. The following year all US forces and bases in the country left. However, part of the base remained as a locally operated logistical supply facility for American warships and submarines.
The former American naval base was converted into commercial and industrial use, administered by the Subic Bay Metropolitan Authority (SBMA). One of the biggest tenants was the HHIC shipyard. Recently, HHIC filed for rehabilitation due to slowdowns in the global shipping industry. Subsequently, two major Chinese shipbuilders indicated their interest in taking over the HHIC operations.
If a Chinese company’s bid is successful, it would be a major victory for China, who had been trying to establish a solid foothold in the Philippines, not only commercial and industrial, but military as well. And considering the close personal relationship between Duterte and Xi, there is a strong likelihood that the facility would be awarded to a China state-owned firm.
The main purpose of the Chinese logistical support base is to replenish their supplies for her military bases in the Spratlys that are closer than Mainland China. As such, it would then be proper to say that a Chinese presence in Subic Bay is just like the Chinese military base in Djibouti, which would play a crucial role in projecting China’s power in the South China Sea and beyond. It would provide China with the capability to connect Subic Bay to Scarborough Shoal to the Paracel Islands; thus, denying the US free and unimpeded passage in the South China Sea to the Western Pacific through the Bashi Channel between Northern Philippines and Taiwan. Later on, China could also take control of the Bashi Channel to take complete control of the First Island Chain, a 30-year Chinese dream.
Meanwhile, Defense Secretary Delfin Lorenzana told a Senate hearing that Duterte was “very receptive” to the idea of the state being a minority investor in a private sector-led rescue of HHIC. Sounds like a great idea. But there is a caveat to this: Would the Chinese companies be allowed to take substantial stock holdings in the takeover of HHIC? Or could it be that President Duterte was in one of his “dyok only” moments?
At the end of the day, one doesn’t fail to notice: Is the Philippines the next Djibouti?