China’s Latin America Loan Double Trouble
The Inter-American Dialogue’s 2015 database of Chinese official loans proclaimed a “doubling down” of commitments which were up $19 billion from the previous year to $29 billion. Development and Export-Import funding was the second highest on record, and over the past decade they have allocated $125 billion, according to the statistics compiled in cooperation with Boston University. The bilateral lines topped World Bank and Inter-American Development Bank combined totals, and Beijing also established $35 billion in regional funds mainly for infrastructure. The recipient countries remain the same four—Argentina, Brazil, Ecuador and Venezuela—with one-third directed to Caracas, although Barbados and Costa Rica got small sums last year. Natural resources are the focus, with Brazil credit to Petrobras and soy processors and a $5 billion Venezuela facility to increase oil output. Bolivia also took $850 million for road projects, and despite the absence of policy conditions, China construction firm use is often compulsory. State-owned commercial banks have entered the mix with Bank of China and ICBC participating in Brazil and Ecuador. The report points out that policy banks raised capital in 2015 to enable them to act counter-cyclically to the regional economic downturn, as they expand trade and investment abroad under the “going out” strategy. It adds that the Chinese finance focus on energy and mining can breed environmental and social conflict, and business and political backlash. It has been a “lifeline” in Venezuela’s case, but sovereign debt default may now loom with creeping collapse evidenced in deep recession, hyperinflation and overstretched reserves. The trackers conclude that the raw materials exchange feature may not be as viable in the current commodities climate and that a new dedicated private equity fund for manufacturing my represent future direction. Argentina may fade as a target as President Macri’s team reviews previous agreements, including a parallel currency swap line from the central bank, and Ecuador’s repayment capacity may also be cramped into 2016.
Buenos Aires has negotiated in New York with holdout creditors that have frozen external bond access pending resolution to lift court collection judgments, and proposed a 30 percent haircut offer in contrast with the 70 percent one under the original exchanges. European bondholders and two distressed funds immediately accepted, and the government moved separately to open the syndicated loan market with a $6 billion pool led by US banks. Terms must be approved eventually by Judge Griesa, who issued the historic “pari passu” injunction against all repayment, and the Argentine Congress, which must amend the “lock law” for a revised deal. Although President Macri’s party is in the parliamentary minority recent opposition defections may improve prospects, and pragmatists among the previously-dominant Peronists urge an end to the confrontation. Barbados’ Chinese borrowing was to turn a well-known castle into a luxury resort, as long-stay tourist arrivals rose 15 percent in 2015 to enable positive growth. However the fiscal deficit at 5 percent and public debt at 105 percent of GDP remain steep, with domestic obligations 70 percent of the latter. Privatization of a shipping terminal may bring in revenue and also invite FDI to counter the 5 percent current account gap, as the island’s double external and internal imbalances endure.
