Update Country Report Maldives 21 Apr 2020

• The novel coronavirus (Covid-19) pandemic will derail BRI co-operation in 2020. As China focuses on tackling the health crisis and restarting economic activity domestically, it will de-prioritise overseas lending, trade and investment under the initiative.
• The global spread of the virus will pose the biggest challenges to BRI co-operation in 2020. Healthcare infrastructure across most BRI markets is poor, and the likelihood of wider economic disruption high, owing to the weak fiscal positions of many BRI nations.
• Although expected regional stimulus should help put a floor under Asian economic growth, lingering restrictions on the movement of people and goods will undermine cross-border trade and investment prospects this year. This will keep BRI activity from normalising until 2021 at the earliest.

The economic fallout of the coronavirus will hit BRI trade and investment activity hard in 2020, both as China deals with the health crisis domestically and as the pandemic sweeps across the world. BRI prospects will remain weak in 2020 as a result, particularly as the spectre of economic crisis spreads across emerging markets. These dynamics will carry implications for countries that have become reliant on Chinese financing and investment to help sustain economic growth.

One of the biggest near-term challenges facing the BRI will derive from China's own coronavirus struggles. Although the viral situation had stabilised by mid-April, The Economist Intelligence Unit expects a broader Chinese economic recovery to be "U-shaped" this year, with firmer growth unlikely to materialise until the second half of 2020. This will have numerous consequences. Most directly, an expected fall in both Chinese merchandise exports and inbound foreign direct investment (FDI)-as well as an uptick in capital outflows, amid investor flight to safe havens-will put strain on the country's foreign-exchange reserves, particularly over the first half of 2020. This will limit space for future BRI lending activity, much of which is denominated in US dollars. Policymakers will also be wary of dipping into these reserves this year, particularly amid the risk of having to draw down these reserves as economic conditions deteriorate further, in order to offset depreciatory pressure on the renminbi.

Indirectly, forthcoming policy directives will likely de-prioritise BRI trade and investment promotion efforts in favour of domestic stabilisation measures. This could create bureaucratic hurdles for project and investment approvals as policy attention is diverted elsewhere. Even after China emerges from the shadow of crisis, however, weak demand for Chinese trade and investment flows in BRI host nations will likely linger later into 2020, as local policymaker attention in those markets is similarly preoccupied.

BRI trade and investment outlook

Prospects for China-BRI trade and investment were already somewhat uneven at end-2019. Growth in Chinese merchandise exports and imports to the BRI were relatively stable that year-growing by 7.5% (to US$736bn) and 3% (to US$580bn), respectively-although overseas direct investment (ODI) flows fell by 3.8% (to US$15bn) over the same period, as international business sentiment fell back against the backdrop of the US-China trade war. Despite that, the value of newly contracted Chinese construction projects in BRI nations increased by 23.1% that year, which initially suggested the carry-over of related activity well into 2020.

Data over January-March indicate that BRI activity remained resilient, despite the collapse of the Chinese economy in February. Merchandise trade growth in January-March between China and BRI nations dropped by 2% year on year in US-dollar terms (against a 13.4% contraction overall), driven primarily by the Association of South-east Asian Nations (ASEAN) as multinationals diverted trade flows to account for disrupted supply chains in China. ODI flows to the BRI in January-February (the latest available data) grew by 18.3%, although this partly reflects a low annual base of comparison.

This resilience is unlikely to persist into the second quarter, as more countries introduce lockdowns to halt the spread of the coronavirus. These headwinds will peak in April-June amid collapsing economic activity in North America and Europe, which will dampen major sources of international trade demand and foreign investment (carrying separate repercussions for BRI countries). Lingering global liquidity constraints and supply-chain paralysis will also put strains on multinational company operations and local currency markets, while restrictions on the movement of people and goods will constrain cross-border economic links.

Significant weakness in healthcare infrastructure among many BRI nations also suggests a prolonged humanitarian struggle against the virus. At worst, this will both intensify and elongate the timeline of the viral impact in these countries. At best, this will dissuade developing countries from restarting economic activity too quickly, owing to fears of second- (or third-) wave infections.

Although China might find opportunities in exporting medical devices and pharmaceuticals to BRI nations, its official "mask diplomacy" has, to date, revolved around exploring commercial opportunities to support Chinese exporters, rather than via donations of healthcare products to affected countries. Low household income levels in BRI markets-combined with limited government procurement opportunities, amid weakening fiscal positions-may disincentivise some Chinese exporters from tapping into these markets. Regardless, any shift would take time to implement; existing China-BRI trade flows are primarily composed of machinery and commodities shipments. Chinese medical goods exporters new to these markets would need to find import partners, ensure compliance with international standards and navigate trade-financing programmes to jump-start any new trade flows. This could, however, become an avenue for future BRI co-operation later in 2020, as demand rises across the developing world for Chinese-manufactured healthcare products.

Uncomfortable questions around debt

The pandemic has also highlighted the spectre of debt defaults across emerging economies in Asia, Africa and Latin America. This may threaten existing Chinese-issued debt disbursed under the BRI umbrella, as inevitable project delays and cost overruns exacerbate financing demands (or delay debt-servicing activities) for ongoing or finished projects.

China will also be under pressure to write off or extend lending to some of the BRI countries as local-currency devaluation poses threats to solvency and debt-servicing activities. This is a particular concern for African and Latin American countries, which are exposed to cratering commodity prices and will see rapid deterioration in their current- and fiscal-account balances this year. Other Asian countries, such as Pakistan and Indonesia, will similarly see their currencies weaken amid sustained investor flight to safe havens.

China has indicated some willingness to offer debt-relief programmes to certain low-income countries. China Development Bank (CDB), one of the major policy banks facilitating BRI lending, has pledged support to coronavirus-hit countries, including low-cost financing terms and special loans for overseas infrastructure projects. There is, however, a growing likelihood that Chinese lenders will be forced into broader debt forgiveness, owing to force-majeure clauses or other arrangements. Widespread debt write-offs could generate a negative feedback cycle that would discourage future Chinese lending activity over the remainder of 2020 (and into 2021).

Even if China increases its concessional lending to these countries, either as part of debt forgiveness or viral containment measures, we expect Chinese overseas lending flows to the BRI to fall this year. This will reflect both weaker risk appetites among Chinese lenders and reduced credit demand in BRI host markets. In some cases, however, failure to engage in debt-servicing activities could pave the way for Chinese investors to repossess certain assets, sometimes owing to enshrined contractual provisions. Even in the absence of such provisions, however, deteriorating economic conditions could create an opportunity for China to do so at a lower price.

BRI project watch

BRI project momentum remained relatively stable over the first quarter, despite the shock to Chinese economic activity over that period. Since January China has signed a number of new regional infrastructure projects across Asia, including several BRI projects in Myanmar, and several railway projects across Africa.

These planned (and existing) projects face an uncertain future. In addition to the financing disruptions caused by the outbreak, BRI construction activity will face significant delays owing to widespread travel restrictions and border controls, which will impact the import of Chinese labour. News reports already indicate that construction of the Colombo port in Sri Lanka, the Jakarta-Bandung high-speed railway in Indonesia, and projects in the China-Pakistan Economic Corridor (CPEC) and the Sihanoukville Special Economic Zone (Cambodia) have already been delayed or suspended as a result of the crisis.

Other projects along the Digital Silk Road, however, may be less vulnerable to disruption. Huawei, a leading Chinese telecoms equipment firm, has continued to push its 5G rollout strategy, signing agreements over the first quarter with companies in Oman, Kenya, Indonesia, Tunisia and the Maldives, despite US opposition. Huawei has also announced plans to build a US$223m manufacturing plant in France for wireless products, its first such presence in Europe. While global economic disruption will delay the timelines of these projects, Chinese policy support for 5G development-as part of larger strategic designs to lead the global 5G rollout-may help engineer a faster investment recovery in this sector than in other industries, particularly as Chinese technology component manufacturers resume (or maintain) their operations.

Diplomatic opposition to the BRI will nevertheless persist, with the coronavirus crisis set to cause a further deterioration in US-China ties. In January Romania ended a nuclear reactor construction deal with China owing to US pressure, suggesting lingering challenges in establishing a stronger Chinese investment presence in Central and Eastern Europe. As the US and China spar over responsibility for the coronavirus and the issue of global leadership, other countries will face an increasingly stark choice of partners.