Looking the gift horse in the mouth

A policy brief I released in July on China's aid program pointed to the worrying trend of loading tiny Pacific states with large loans that they would struggle to repay. One example singled out was the US$9.6 million soft loan China made to the Cook Islands (population 21,000) to fund facilities related to the South Pacific Mini Games. I recently learned the loan was one reason the Cook Islands had its credit rating downgraded last month by Standard and Poor's.

According to the news report:

Standard & Poor’s credit analyst Kyran Curry says, “Apart from the loans to fund infrastructure development, we believe the borrowings and use of debt repayment reserves to fund the hosting of the South Pacific Mini Games may illustrate a weakening commitment to fiscal consolidation and in upholding past reforms.

There are other Pacific countries taking on substantial debts as a result of Chinese soft loans (the loan Tonga took out in 2007 was worth 22% of its GDP). The Chinese soft loans have five year grace periods, and given China has only recently stepped up its lending to the region, the full impact of these loans has yet to be felt.