Frontier markets have always relied on foreign loans and investments in order to kick-start growth and support the economy. Developed countries like the US have been the main investors in the past but there has been a growing trend of countries still considered “developing” becoming net investors, most notably with China and Brazil. Securing natural resources to fuel domestic growth has been the driving factor behind this investment, but there have also been other reasons for their dollar diplomacy.
In China’s case, one reason has revolved around Taiwan. While relations have warmed under the leadership of Ma Ying Jeou, Taiwan’s independence remains a sore point for China. With their economic clout and promises of investment, many countries have switched from diplomatically recognizing Taiwan to recognizing China, with Chad (2006), Costa Rica (2007), and Malawi (2008) among the most recent countries to switch. While we take no position on the One-China Policy, identifying the countries most likely to receive investment due to their change in allegiance would be beneficial to frontier market investors hoping to ride a wave of growing investment.
Out of all the countries in the world, there are just 23 countries in the world that still recognize Taiwan rather than the PRC, a list dominated by Central America. We filtered for countries that had populations above 5 million, leaving the following 8 countries:
- Burkina Faso
- Dominican Republic
- El Salvador
Countries likely to receive future Chinese investment due to their stance on Taiwan (in order of likelihood):
1. Chad, Costa Rica, and Malawi:
All three countries broke off diplomatic ties with Taiwan citing economic reasons, and China has delivered as promised. In Chad, China began drilling for oil a year after Chad switched allegiance, and began operating a jointly owned refinery in 2011, the jewel of the $1 billion Ronier project focused on building oil infrastructure. China and Costa Rica signed a Free Trade Agreement in 2010, and Costa Rica has enjoyed everything from top-notch soccer stadiums to expansions to refineries. A year after recognizing China, Malawi joined the Forum on China-Africa Cooperation (FOCAC) in 2009, a summit that meets every 3 years and has fostered bilateral trade between Africa and China. Malawi’s trade volume with China hit $100 million in 2011 (a 400% yoy increase), having already skyrocketed in 2010. China has also invested in the cotton and textiles industries, although there has recently been backlash against small-businesses run by the Chinese. The main point here is that trade increased substantially for all three countries after breaking ties with Taiwan. Also, rather than a one-time investment from China as payment for this switch, China has continued to actively invest in all three, fostering a strong economic relationship with all three.
2. Burkina Faso:
Burkina Faso immediately sticks out in the list, with all of its neighbours and most of Africa having already established formal relations with China. The country is also home to natural resources, with the bulk of its exports consisting of gold and cotton.
So why hasn’t Burkina Faso followed the lead of virtually every other country in Africa?
The main reason is that Taiwan has been active in investing in the country, keeping China at bay with its own dollar diplomacy. By most counts it seems to be working, with Ma Ying Jeou received warmly when he paid a visit to the country in April 2012. Another reason could be the political instability rampant in the nation with a history of military coups and mutiny. With all the internal conflict and disputes domestically, foreign affairs have taken a backseat.
However, it seems like only a matter of time before they switch diplomatic relations to China. Despite Taiwan’s best efforts, China has far more resources and expertise when it comes to building infrastructure in Africa. China also has the added benefit of being the biggest destination for Burkina Faso’s exports, an economic relationship that will only become more important. Also, as one of the poorest countries in the world, Burkina Faso is in no position to refuse investment on ideological grounds.
3. Dominican Republic
While the long-feared “domino effect” of Central American nations joining Costa Rica in recognizing China did not materialize, China has continued to apply pressure to holdouts in the region. While cases could be made for Belize or Panama to be next, the Dominican Republic is much larger and a more intriguing candidate for moving over to China’s side.
China has already poured money into the country, with a $462 million loan towards a tourism project in October 2010. But the most compelling statements came from tourism minister Francisco Javier Garcia, who reportedly said “We aspire sooner than later, our relations with the People’s Republic of China are complete relations and absolutas..” While almost two years have passed since then and the Vice President of Taiwan scheduled to visit the Dominican Republic today, the DR remains the most likely out of all the large Central American nations to recognize China over Taiwan.
In an effort to expand its influence and win over any holdouts still loyal to Taiwan, China has embarked on an all-out charm offensive. Countries who still recognize Taiwan are likely to be targets for capital investment, and represent good opportunities for frontier market investors looking to get in before the wave. Chad, Costa Rica, Malawi, Burkina Faso, and the Dominican Republic are our favoured markets in this situation.