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Chart: Who Relies on Taiwanese Trade?

Source : Statista

Chart: America’s Brewery Boom

Source : Statista

Is the Semiconductor Cycle Turning?

Lim Hui Jie wrote . . . . . . . . .

In the 1965 sci-fi novel Dune, civilisations across the entire universe fight for control over the spice melange trade. A line from the 1984 movie adaptation summarises its importance: “He who controls the spice, controls the universe.”

As explained in the novel, the spice, harvested painstakingly by filtering sand from the vast desert, enabled deep space travel so that trade could flourish and planets prosper.

To a certain extent, today’s semiconductors — essentially made from sand as well — are the spice melange in this millennium.

After all, semiconductor chips sit in the heart of countless devices ranging from the simple TV remote to a supercomputer that can process quadrillions of floating-point operations or flops per second. Without these chips, there would be no electronic devices beyond the simplest ones. There would be no smartphones, radios, TVs, computers, video games as well as advanced medical diagnostic equipment.

Throughout 2020 and 2021, these bits of silicon came under the spotlight when a spike in demand, coupled with closures of factories, ports and airports around the world, led to a global shortage of semiconductor chips.

The immediate impact was felt far and wide. Cars sat unfinished on factory floors while prices of laptops, smartphones and tablets soared. More than a year after its launch, Sony Group Corp’s newest flagship game console, the Playstation 5, is still not widely available while Samsung Electronics delayed the launch of its Galaxy Note smartphone until this year. Meanwhile, Japanese carmaker Toyota Motor Corp was forced to cut production by 40% last September. Other carmakers such as Honda Motor, Ford Motor Company and General Motors Company were similarly impacted.

Viewed from another perspective, in these two years, semiconductors were arguably the most sought-after commodity apart from masks, medical PPE and Covid-19 vaccines.

To alleviate the crunch and tame soaring prices, various semiconductor manufacturers promised capacity expansions with market-leading foundries like Taiwan Semiconductor Manufacturing Corp (TSMC) and Samsung Electronics, which makes chips based on the designs of customers, ramping up investment.

Similarly, Intel Corp, which designs and makes its own chips, is planning to pour substantial capital to raise both its manufacturing capabilities and capacity. In a Sept 8, 2021, report by Reuters, Intel announced it could invest as much as EUR80 billion ($123.85 billion) in Europe over the next decade and open up its semiconductor plant in Ireland for automakers.

Elsewhere, Intel announced In October 2021 it is spending US$20 billion ($27.11 billion) on a new plant in the US state of Arizona. Most recently on Dec 13, 2021, Intel announced it is spending US$7 billion to build a new plant in Penang, where it already has a significant presence for years.

“Industry players are responding to the chip shortage by building capacity, driving yields and supply as rapidly as possible,” Intel CEO Pat Gelsinger told a press conference in Malaysia on Dec 16, 2021. “Overall, the semiconductor industry this year will grow more than it has in the last two to three decades,” he adds.

Meanwhile, TSMC also reported in July 2021 that it plans to build new factories in the US and Japan after previously announcing it will spend US$100 billion over the next three years to expand chip-fabrication capabilities. TSMC also added it will expand production capacity in China and does not rule out the possibility of a “second phase” expansion of its US$12 billion factory in Arizona.

Supply and demand

However, the billion-dollar question (literally speaking) is this: With a surge of new supply projected to come sometime between this year and next year, will the market suffer from overcapacity? Could this then send semiconductor prices crashing, reversing the fortunes of semiconductor companies?

While this “boom and bust” phenomenon had happened regularly in the past, analysts do not think there will be a correction this year because the shortage is a bigger and more immediate worry although there will be some lifting of upward pricing pressure eventually.

In spite of any indications to the contrary, the industry is now at its all-time high. According to the Semiconductor Industry Association (SIA), global chip sales hit a record in 2021 at US$555.9 billion, up 26.2% over 2020. However, the US-based industry body expects a moderation this year, with an estimate of 8.8%. “It’s still really trending very strongly towards increased demand. We’re just not going to get this kind of slingshot effect that we had in the pandemic,” says SIA CEO John Neuffer of the much slower growth seen.

DBS Group Research analyst Ling Lee Keng tells The Edge Singapore that while the semiconductor sector has grown about 25% in 2021, she expects “high single-digit” y-o-y growth in 2022, in line with SIA’s estimates.

Ling expects the industry to hit a cycle peak sometime in 2023. “Then in 2023 or 2024, we could see a surge in new capacity, leading to a drop in the prices of chips,” she says, adding that the drop is only in the “single digits” and that the uptrend will remain intact, albeit at a slower growth rate. She expects the industry to grow at a CAGR of 9% from 2020 to 2025 which is expected to slow to 3% from 2023 to 2025.

PhillipCapital’s senior analyst Terence Chua agrees. “The current shortage is unlikely to be resolved by the end of 2022 and will actually follow through to 2023,” says Chua at a recent presentation.

Despite additional supply coming from the foundries, Chua expects these to be soaked up by strong demand from customers like Nvidia, which specialises in graphics processing capabilities that have found new use cases in crypto mining, and Advanced Micro Devices (AMD), which is competing more strongly than before with market leader Intel. He calls the oversupply concerns “overblown” and continues to be bullish on the demand for advanced nodes.

Unlike glovemakers setting up shop from scratch during the pandemic and hitting production targets within months, semiconductors are much more complicated to build and certify. Thus, it takes significantly more time to bring in supply from new plants, he adds. Says Chua, “Although Intel says we’re going to set up a new plant in Europe, in China and Arizona, it is not going to come onstream [quickly enough].”

“When you want to build an advanced chips plant like the way TSMC does, it takes at least one and a half years to do so. Sometimes, Intel even takes longer,” he adds. This could also be delayed by geopolitical problems around the world which could exacerbate the supply shortage although Chua admits it is difficult to gauge the exact impact of these developments.

Other analysts like Phelix Lee of Morningstar are more cautious. He tells The Edge Singapore that the semiconductor industry is “quite close to the peak” this year and expects the shortage to ease in the second half after carmakers resolve their shortage. Come 2023, prices should start moderating and while 2024 could see an oversupply situation happening as more new capacity becomes operational that year and bring about the “tipping point” from a shortage to an oversupply.

“Recent foundry announcements to expand will only add pressure to the next oversupply, as previous cycles dictate,” says Lee, noting that strong year-on-year increases in capital expenditure are often followed by significant slowdowns in market growth. These slowdowns are due to capacity momentarily expanding faster than demand, which leads to aggressive price cuts by foundries to sustain utilisation.

Source : The Edge Singapore

The Lifecycle of a Semiconductor Chip

Gabrielle Athanasia and Gregory Arcuri wrote . . . . . . . . .

With the global economy reeling from a shortage in semiconductor chips, policy makers have turned their attention to strengthening the resilience of the supply chain, recognizing the centrality of this technology to economic growth and national security. This supply chain incorporates the extremely complex and costly processes of harvesting raw materials, designing, manufacturing, packaging, and shipping that are now carried out across the world to produce the variety of semiconductors that go on to live in our toasters, smartphones, computers, buildings, and cars.

To better understand the vulnerabilities in the semiconductor supply chain, we take a closer look at each step in a chip’s life cycle.

What Are Semiconductors and What Materials Are Required for Their Manufacture?

A semiconductor is a physical substance designed to manage and control the flow of current in electronic devices and equipment. The name “semiconductor” comes from the fact that a semiconductor chip is made from material that is neither entirely conductive of electricity nor fully insulating. They are typically created by adding impurities to, or “doping”, elements such as silicon, germanium, or other pure elements to alter their conductivity. A “wafer” of silicon or another semiconductor material is then edited to create complex circuits, which are capable of completing computing tasks. Examples of conventional devices and components built by using semiconductors include computer memory, integrated circuits, diodes, and transistors.

Semiconductors are typically made from one of two elements whose molecular structure when crystalized is secure enough to facilitate and regulate an electrical current: germanium and silicon. Germanium, the element on which the first transistor was developed, is a relatively rare and, therefore, expensive semiconductor. Currently, the U.S. maintains greater than 50% reliance on imported germanium from Belgium and China. U.S. germanium reserves are estimated to be near 2,500 tons, significantly behind China, which leads annual production at 85,000 tons. Silicon, however, is the second-most abundant element on Earth, accounting for roughly 28% of the Earth’s crust. While pure silicon, an ideal semiconductor, does not occur naturally on Earth, it can be synthesized by superheating silicon dioxide with carbon materials.

How are Semiconductors Designed?

While the science that undergirds the logic of a semiconductor’s basic functions is relatively simple, the mass-manufacturing of such small and delicate electrical components requires a complex design process. According to Synopsys, a chip design and verification firm, the process can be broken down into five steps.

The first of these is the architectural design of the chip, wherein the parameters of the chip are determined including its size, desired function, level of power consumption, and preferred cost.

Next is the logic and circuit design. After the parameters are outlined, engineers begin translating the required functions into circuit logic. Today, this process is done on automated logic simulators to verify that everything is in order before production.

Third is the physical design phase. Here, the circuit logic is mapped onto a silicon wafer. Essentially, this is a plan of where each transistor, diode, or other component will sit on the chip.

Finally, the verification and sign-off phases are used to verify whether the designed chip is manufacturable and whether it can withstand the physical stresses of its assigned function. Specifically, added resistance from wiring, signal crosstalk, and variability are all factors to be considered.

How are Semiconductors Manufactured, Packaged, and Shipped?

The process used to print circuits onto silicon-crystal wafers is called “photolithography.” The silicon wafer is coated with a layer of light-resistant material called the “photoresist.” Then, using photolithography, the photoresist is weakened or hardened in certain pre-determined regions by exposing it to UV radiation (light). During a step called “etching” the weakened sections of photoresist are removed. The exposed silicon crystal is then “doped” with impurities to alter its conductivity and create microelectronic components like transistors and diodes. Thousands of these circuits can be printed onto a single wafer side by side, and the wafer will go through a series of other complex steps before it is completed. Finally, each “die” of semiconductor is sliced from the wafer using precision sawing or laser technology.

Silicon chips are extremely fragile microelectronics that can be irrevocably damaged by excessive vibration, temperature fluctuations, or even static electricity. This has spurred the inception of an entire new industry adjacent to semiconductor manufacturing: chip packaging. Packages are meant to protect the semiconductor and facilitate its connection to a larger circuit or board. While packaging innovations and production used to be an entirely separate process, chip manufacturers themselves have begun developing expertise and integrating it into the manufacturing process. The fragility of the semiconductors also affects their shipping process, which must be done by specialized logistics firms.

An Interdependent and International Supply Chain

Because semiconductors are extremely complex products to design and manufacture, a highly specialized global supply chain has developed over the past few decades. The supply chain has four main components: sourcing of raw materials, design, manufacture, and packaging. Complicating matters, different countries specialize in each component.

In terms of raw materials, China is the world’s leading supplier of silicon, accounting for an estimated 64% of total silicon materials in 2019 according to the U.S. Geological Survey.

With regards to the design phase, the United States is still the world’s leader. Seven of the top ten integrated circuit design companies by annual revenue are headquartered in the United States. Often, these firms operate via a “fabless” business model, whereby they design the chips, then license the intellectual property (IP) to firms around the world to produce them. The name “Silicon Valley” is therefore a holdover from the days that the U.S. dominated this global industry.

Yet, for a few decades now, Taiwan has been the undisputed global leader in terms of market share for semiconductor manufacture. Taiwan Semiconductor Manufacturing Co. (TSMC) alone accounts for roughly 54% of all global foundry revenue. South Korea’s Samsung trails TSMC at 17%, while Global Foundries, the largest U.S.-based manufacturing firm, controls 7% of the market. Adjacent to manufacturing, the Dutch firm Advanced Semiconductor Materials Lithography (ASML) is currently the only company in the world that builds lithographic machines powerful enough for the most sophisticated chips. Each machine is comprised of over 100,000 individual parts and costs roughly $150 million. The firm ASML is expected to hit $28-$35 billion in annual revenue by 2025. This makes the Netherlands a key node in the global semiconductor supply chain.

According to the Center for Security and Emerging Technology, the semiconductor assembly and packaging market is extremely diverse, with firms from the United States, Japan, China, South Korea, Singapore, and the Netherlands specializing in inspecting wafers, “dicing” them into individual chips, packaging them, and integrating them into larger electronic components.

These realities mean that each node on the semiconductor supply chain is interdependent on one another. States rely on international trade to move materials, equipment, and products around the world to facilitate the manufacture of this key ingredient in the global high-tech economy.

Full self-sufficiency, therefore, is a difficult and expensive goal to achieve. According to a study conducted by the Boston Consulting Group, if regional supply chains (U.S., East Asia, China, Europe, and others) wanted to reach total self-sufficiency, it would require $1 trillion in incremental up-front investment to meet current levels of semiconductor consumption. It would also result in a 35% to 65% overall increase in semiconductor prices and higher costs of electronic devices for end users. The study also concluded that even to meet projected semiconductor demand in today’s globally connected market, the industry will need to invest at least $3 trillion over the next ten years in R&D and capital expenditure alone.

Recent Strains and Efforts to Alleviate Them

While disruptions in the semiconductor supply chain caused by COVID-19 brought awareness of the global chip shortage into the public domain, the issue predates the pandemic. Given their ubiquity in the devices that power the modern digital economy, demand for chips has been skyrocketing for decades, and will continue to increase along with demand for technologies like mobile phones and electric vehicles according to a recent report by Accenture. As the industry struggles to keep pace, ‘black swan’ events like earthquakes, floods, and fires (such as the blaze at the Renesas chip manufacturing plant in Japan) have had disastrous cascading effects. Pandemic-related lockdowns and border closures only exposed and aggravated the supply chain’s inherent fragility caused by its international nature and intensifying global demand.

In response to these developments, policy makers around the world have unveiled plans to bolster their domestic manufacture of semiconductors to mitigate the worst effects of supply chain breakdowns. In Europe, the European Commission has drafted legislation to mobilize over €43 billion in public and private funds to double its share of the global semiconductor manufacturing market by 2030. Meanwhile, in the United States, lawmakers continue to debate the CHIPS for America Act and the FABS Act, which provide lump-sum and tax-based incentives for chip manufacturers to “onshore” their operations. These efforts, while they have yet to take effect, will be the first steps in strengthening regional and national resiliency against future crises plaguing the supply chain of this critical technology.

Source : Center for Strategic and International Studies

How Henan Bank Scammers Weaponized the Language of Inclusive Finance

Rao Yichen wrote . . . . . . . . .

On April 18, five village and township banks in the central provinces of Henan and Anhui did the unthinkable: Claiming “system maintenance,” they abruptly blocked depositors from transferring or withdrawing their money from their accounts.

Overnight, tens of billions of yuan were effectively frozen; some 400,000 account holders in provinces and cities across the country were affected. One entrepreneur lost as much as 40 million yuan. A single mother’s life savings disappeared. Medical bills became unpayable. Those who gathered in Henan to protest saw their local health codes mysteriously turn “red” — indicating a positive COVID-19 test or close contact with a COVID-19 patient — preventing them from traveling or entering the bank premises to withdraw their money in person.

The scandal soon took on national proportions, and not just because of the abuse of the health code system. This wasn’t a fly-by-night operation: The five banks were fully accredited and had marketed fixed deposit products to consumers all over the country via established and trusted fintech platforms like JD.com’s JD Digits and Baidu’s Du Xiaoman Financial.

The possibility that even accounts in the formal banking system might be scams has shaken public faith in the country’s banking system. A police investigation pointed the finger at the chairman of the banks’ corporate parent, the Henan New Fortune Group, but many depositors are still waiting to see what percentage — if any — of their money can be recovered.

At the policy level, the incident has cast a pall over a cornerstone of China’s “inclusive finance” campaign. Village and township banks first emerged as a distinct class of banking institution in China in 2006. At the time, the country’s large, brand-name banks were generally only willing to lend to state-owned enterprises, firms contracted to build government infrastructure, or companies that could show the kind of rapid growth needed to keep up with banks’ own high interest rates. One of my research participants told me that, as late as 2005, a private chemical plant he worked for with an annual income of 700 million yuan (then about $85 million) struggled to obtain bank loans at reasonable interest rates.

Village and township banks were meant to help address these gaps. Based in rural areas, they offered basic services to residents of China’s vast and largely unbanked countryside. After a short, three-year pilot period, the scheme was fast-tracked. Over 200 village and township banks were established in 2010 alone; by late 2021, there were 1,651 registered village and township banks nationwide, accounting for 36% of all Chinese banking institutions.

In economically developed coastal provinces like Zhejiang, village and township bank performances were relatively strong, but the majority of the banks, especially those in less-developed parts of central or western China, struggled. Residents of these regions have significantly lower incomes than on the coast and there are fewer rural enterprises with which to do business. Unable to compete with the brand recognition of more established commercial banks, village and township banks generally attracted clients rejected by other institutions.

In the face of these difficulties, much of the foreign and state-owned capital that had initially backed village and township banks faded away, leaving private capital dominant in an increasingly messy, competitive market.

Nevertheless, village and township banks were made a central part of a 2015 plan by the State Council — China’s cabinet — to promote inclusive finance. The goal was to reach people and businesses the traditional bank credit business was unwilling to cover, such as small- and micro-enterprises, farmers, low-income urban residents, and the poor and disabled, thereby boosting social equity.

The reality proved far more complex. Village and township banks have had a hard time competing with larger state-owned commercial banks. To poach depositors away from established competitors, they must offer higher interest rates, but the only way to cover these outlays is to charge higher interest on loans, which costs them their best potential customers.

Around this time, some village and township banks saw a possibility of survival in another key inclusive finance initiative: online banking and financial technology platforms. It was the peak of the peer-to-peer (P2P) lending craze and online platforms were marketing themselves as “financial innovations” for facilitating loans to small-, medium-, and micro-enterprises.

Many village and township banks, facing growing competition and under pressure to meet the needs of the inclusive finance campaign, sought to cash in on the fintech boom to fund their operations. They partnered with online financial platforms, allowing them to use their financial services licenses — and the air of legitimacy the licenses provide — in exchange for the ability to market “online deposit” products to the platforms’ national user base.

The scheme was relatively simple: depositors would sign up for a special deposit account with a bank through a third-party platform. Their savings would then be transferred from their primary account — typically at a larger commercial bank — to a new account at a smaller institution like a village and township bank.

For depositors, the benefits were obvious. The smaller banks, hungry for deposits, offered high interest rates — typically over 4%, compared to less than 3% at larger banks — to anyone willing to park their savings in an account. There was little reason to see the accounts as risky: Although interest rates were higher than average, they were still far below those promised by the now defunct P2P industry. And the institutions were all accredited banks included in the country’s deposit insurance scheme.

Strictly speaking, village and township banks are not supposed to take in deposits or hand out loans outside their base of operations. Because they are overseen locally, if they encounter problems outside their jurisdiction, it can have ripple effects elsewhere. But online fintech platforms let them quietly market their products to users across China.

The result was a shadow banking system in which small village and township banks, meant to serve local residents, were attracting funds from a wide range of users all over the country, causing regulatory problems and greatly increasing the risk of a cascading crisis.

Even before the Henan case, the government recognized the problem and moved to rein in online deposits. For example, in late 2020, 10 platforms, including Alipay and JD Finance, were ordered to delist all online deposit products.

That village and township banks had been involved in the industry and were exposed to the risks was not a secret. In early 2021, banks were banned from offering long-term fixed deposit products on third-party financial platforms under a new regulatory policy. But at least some institutions found ways to skirt the new rules. Several of the banks implicated in the recent scandal launched self-developed apps targeting online “savers.”

To reassure clients, many village and township banks used misleading language to imply their services were government-backed or approved. High-risk loans were reframed as “inclusive finance”; high-interest financial products were packaged as ordinary and safe “deposits” that were securely insured. This public-facing language, which promised legitimacy and credibility, covered for the banks’ “hidden script”: a reckless pursuit of risky profits. It also lowered people’s natural skepticism of tech-related scams. In the Henan case, in which app users’ money was supposedly saved through a bank app designed to look official, even bank employees failed to realize that the money was being redirected.

As recently as a few months ago, village and township banks were hailed as innovators in the field of inclusive finance. That praise has dried up during the Henan crisis, but the risks remain. This isn’t China’s first case of bank-related malfeasance. Now that the alarm has sounded, regulators must seriously examine and address the deep-seated problems plaguing the country’s financial institutions. Otherwise, depositors will keep falling for the same old tricks.

Source : Sixth Tone

South Korea’s Chip Stockpile Swells in Warning Sign for Exports

Sam Kim wrote . . . . . . . . .

South Korea’s semiconductor stockpiles expanded at the fastest pace in more than six years, adding to concern about the outlook for exports that drive the country’s economic growth.

Nationwide inventory soared 79.8% in June from a year earlier, the statistics office said Friday, up from a 53.8% jump in May. At the same time, both production and shipments decelerated, suggesting a slowdown in the nation’s most profitable industry.

The result casts a pall over the outlook for an economy where the central bank is in the midst of a yearlong tightening cycle. Memory chips are sold worldwide and underpin the strength of the won, which has been one of Asia’s worst performing currencies this year as trade deficits mount.

South Korea was in the midst of a two-year export slump when chip inventories soared by 104.1% in April 2016.

The accumulation in stockpiles comes as Samsung Electronics Co. and SK Hynix Inc., two of the world’s largest memory-chip producers, warn future sales may weaken, adding to concerns about a global slowdown as inflation spurs global central banks to tighten.

The two firms’ shares prices have still gained in recent weeks as investors bet the companies will cut capital spending, a move that would eventually tighten supply. The tiny components are used in everything from smartphones to laptops and cars.

South Korea’s overall industrial production rose 1.4% in June from a year earlier, less than the 2.1% forecast by economists.

Source : BNN Bloomberg

Infographics: The World’s Largest Container Shipping Companies

See large image . . . . . .

Source : Visual Capitalist

Chart: U.S. New and Used Vehicle Prices Have Soared Since the Start of the Pandemic

See large image . . . . . .

Source : GRID

China Factory Activity Sinks, Weighing on Weak Economy

Joe Mcdonald wrote . . . . . . . . .

Chinese manufacturing’s recovery from anti-virus shutdowns faltered in July as activity sank, a survey showed Sunday, adding to pressure on the struggling economy in a politically sensitive year when President Xi Jinping is expected to try to extend his time in power.

Factory activity was depressed by weak global demand and anti-virus controls that are weighing on domestic consumer spending, according to the national statistics agency and an official industry group, the China Federation of Logistics & Purchasing.

A monthly purchasing managers’ index issued by the Federation and the National Bureau of Statistics retreated to 49 from June’s 50.2 on a 100-point scale on which numbers below 50 indicate activity declining. Sub-measures of new orders, exports and employment declined.

“Downward pressure is great,” said economist Zhang Liqun in a statement issued by the Federation. “The impact of the epidemic is still on the rise.”

The ruling Communist Party has stopped talking about this year’s official economic growth target of 5.5% after output shrank in the three months ending in June compared with the previous quarter.

The slowdown, which raises the risk of politically volatile job losses, adds to challenges for Beijing ahead of a ruling party meeting in October or November when Xi is expected to try to break with tradition and award himself a third five-year term as party leader.

An announcement Thursday by party leaders promised to “strive to achieve the best results” but avoided mentioning the annual growth target announced in March.

The party has promised tax rebates and other aid to help entrepreneurs after anti-virus controls temporarily shut down Shanghai and other industrial centers starting in late March.

The port of Shanghai, the world’s busiest, says activity is back to normal, but factories and other companies are operating under anti-virus controls that limit their workforces and weigh on production.

An index of production tumbled to 49.8 from June’s 52.8. New orders declined 1.9 points to 48.5. New export orders lost 2.1 points to 47.4.

Chinese leaders have avoided large-scale stimulus spending, possibly for fear of reigniting a rise in debt that they worry is dangerously high.

Source : AP

Source : Trading Economics

Zambia Cancels US$1.6 billion Chinese Loans and Halts Infrastructure Projects in Move to Avoid Debt Crisis

Jevans Nyabiage wrote . . . . . . . . .

Zambia has cancelled US$1.6 billion in agreed upon but not-disbursed Chinese loans, mostly from China Exim Bank and the Industrial Commercial Bank of China, to help manage its debt woes.

It is a portion of the US$2 billion that Lusaka has cancelled in undisbursed loans from its external creditors, coming shortly before its official bilateral lenders agreed on Saturday to provide debt relief to the Southern African nation.

Lusaka announced that it ceased the construction and rehabilitation of several roads, highways and information and technology projects, most funded by China Exim Bank, after it faced challenges in making loan payments.

“Measures have been taken by the government of the Republic of Zambia to address the current debt challenges – beyond the debt restructuring process. Cabinet, at its sitting on Thursday … took measures to discontinue some loan-financed projects,” Zambia’s Ministry of Finance and National Planning announced on Saturday.

Further, it said a few critical projects would be re-scoped to allow critical components to be finished using budget resources allocated over the medium term.

The ministry said it had started talks with creditors and contractors to formalise the cancellation of works contracts.

Among the projects cancelled are the rehabilitation of a major highway – the US$1.2 billion Lusaka-Ndola dual carriageway funded by China Jiangxi Corporation – which was to link the capital to the country’s Copperbelt Province. Lusaka has engaged China Jiangxi to cancel US$157 million in undisbursed loans.

Digital projects, such as Smart Zambia phase II and digital terrestrial television broadcasting systems in Zambia phases II and III, have also been stopped as the country moves to avert a debt crisis.

Zambia said it had notified Chinese lenders and contractors about plans to cancel undisbursed loan balances for 14 projects.

It will move to stop the disbursement of US$333.2 million for Smart Zambia phase II, which was being implemented by Huawei Technologies and funded by China Exim Bank.

The initial phase of the project involved building a national data centre and an ICT talent training centre. Huawei was to develop Zambia’s national broadband system to bolster public service delivery in subsequent phases.

The country has also asked China Exim Bank to cancel US$159 million earmarked to fund the building of Chalala army barracks in Lusaka.

Besides Chinese loans, Zambia also plans to cancel loans advanced by the British Standard Chartered Bank for the building of Kafulafuta Dam for US$381.7 million, of which US$224.6 million had already been disbursed. The other is a multimillion-dollar deal involving Israel Discount Bank to fund military aircraft and equipment.

In 2020, Zambia became the first African country to default during the pandemic when it failed to make payments on US$17 billion of external debt, including US$3 billion dollar-denominated bonds. Lusaka owes Chinese lenders about US$6 billion, which went into building mega projects, including airports, highways and power dams.

In addition to cancelling contracts and stopping the disbursement of loans, Lusaka has received a reprieve after official creditors led by China and France agreed to provide debt relief. The decision paves the way for the country to access a US$1.4 billion bailout from the International Monetary Fund. Still, Lusaka has to seek similar relief from private creditors over the US$3 billion it owes Eurobond holders.

It had sought debt relief from the Group of 20 wealthiest nations and its top private creditors under the G20’s new Common Framework to help more than 70 developing countries with post-Covid debt restructuring and relief. The process allows creditors to jointly renegotiate its foreign debt – even though China usually prefers bilateral negotiations.

The official creditor committee for Zambia – co-chaired by China and France with South Africa acting as a vice-chair and including IMF and World Bank staff – met on July 18 where they committed to offering Zambia debt relief.

IMF managing director Kristalina Georgieva welcomed the official creditors’ move to provide financial assurances, clearing the way for a fund programme, saying it showed the “potential of the G20 Common Framework for debt treatment to deliver for countries committed to dealing with their debt problems”.

“The delivery of these financing assurances will enable the IMF executive board to consider approval of a fund-supported programme for Zambia and unlock much needed financing from Zambia’s development partners,” Georgieva said.

“Amid elevated debt levels and tightening financial conditions, I look forward to the Common Framework working for other countries facing debt problems.”

Zambia’s Minister of Finance Situmbeko Musokotwane said the country would “continue to work with both official and private creditors to agree on the terms of the debt restructuring in line with the comparability of treatment principle”.

The Common Framework aims to help countries weather the Covid-19 storm with debt relief and restructuring, but besides Zambia, only Ethiopia and Chad have applied to join the plan, with most countries fearing that by seeking relief their credit rating will be downgraded by rating agencies.

Source : Yahoo!