CHINA - ARGENTINA - post COVID-19 economy

The post COVID-19 economy will find Argentina with the need for serious infrastructure development and financing. China will be the only country able to provide both of them in the short and medium term. Many Chinese companies are already operating in Argentina and Latin America, but the opportunities will multiply: roads, bridges, nuclear plants, clean energy, windmills, trucks and cars, ports, pipelines, trains and railways, logistics, heavy and light industrial equipment, mobile 5G technology, and artificial intelligence, among other fields. There will also be opportunities for mergers and acquisitions involving distressed companies and assets in Latin America.

The economic and human costs of Latin America's huge infrastructure gap are difficult to calculate, but are certain to be enormous, which is why the region's links with China are becoming so important.

In Argentina, difficult pre-existing economic times are part of the problem: the debt restructuring, a deep recession and rampant inflation makes it impossible to invest in infrastructure, and financing can be difficult to obtain.

By expanding globally China has mastered to combine the two main factors for economic growth: an increasing aggregate demand (AD) paired with an increase in aggregate supply (productive capacity).

If there is one thing that China has understood, it is the importance of partnership to create new markets by helping countries to build infrastructure and ensure economic development. The Belt and Road Initiative (BRI) has always been predicated on this understanding. In the post COVID-19 economy the BRI should be shifting its approach away from unilateral funding of projects and toward more partnerships with multilateral and local institutions to be able to attract more partners throughout Latin America. The outbreak of the coronavirus pneumonia may have stressed China's economy, but it also has emphasized the importance of these links in long term development planning, particularly in areas like transportation infrastructure, trade, mining, agriculture and healthcare.

China has been already investing in and financing infrastructure projects around the world long before the BRI was announced in 2013 refurbishing the old Silk and Road program. The new Silk Road is China's ambitious plan to boost its worldwide reach through new train and shipping lines, roads and ports. Following the old Silk Road, the Belt and Road Initiative (BRI) crisscrosses from Asia to Africa and Europe. The BRI helped to boost these projects. Financing made available through the China-led Asian Infrastructure Investment Bank since 2016 also contributed. Now is the time for Latin America. Latin America will certainly benefit.

It is a win-win approach. Trade between China and Latin America rose by 19 percent in 2019 to $307.4 billion, according to data by different financial information services providers. China is the second-largest trading partner for Latin America after the United States.

The main difference with prior projects should be to slowly shift from Chinese investments in the form of loans to partnerships with local companies or domestic institutions. This approach is likely to prove more sustainable for everyone. For China, working in partnerships could mean lower levels of investment and lower default rates. For Latin America a way to develop its private business sector.

The increasing influence of China in Latin America will be also the consequence of the role (or absence of it) of the United States in the region. With the United States closing into itself, it will leave behind funding voids throughout the region. China and Chinese initiatives like the BRI are likely to be increasingly sought after as partners for infrastructure initiatives throughout Latin America. Manufacturing in the United States will be one of the leitmotifs of this year presidential elections. USA financial resources will concentrate in domestic development. The USA is abandoning the leadership role of the Western World it assumed after the Second World War.

China seems to be willing to emerge as a key factor in securing a new economic order. China, the world's second-largest economy, is Argentina's main trading partner, with trade worth $16.5 billion in 2018, according to official Argentine figures. About two-thirds of that is exports to China. In 2018, China bought 20 percent more from Argentina than the previous year.

Argentina's economy is expected to shrink 3.1 percent or more this year, and inflation is likely to be above 54 percent, according to International Monetary Fund forecasts. The country's debt-to-GDP ratio has spiked to 93.3 percent. Spiraling inflation, debt, economic life support from the IMF and taxes, which add up to about 30 percent of the GDP, leave few options for an economy that has already defaulted on $93 billion of its debt in 2001 and is in the verge of defaulting again, in spite of the efforts of the present Government to find a sustainable solution to the debt problem.

Extraordinary hard currency revenues were expected at the end of 2019 when the present Government took power coming from exports of mining, oil and gas and traditional agricultural commodities. Those resources are not available now with the exception of the agricultural commodities. China remains as the only country with the possibility of expanding purchases of Argentina's soybeans, other agricultural products and meat after approvals already obtained in the middle of last year. Lithium and gold have been two of the stellar mining products for Chinese companies. Over 20 percent of total investments in the sector has come from China, according to industry figures.

The paradox is that when countries in the world are looking into inwards solutions to solve the crisis of COVID-19, China apparently has find such solution by expansion. The international market is the survival kit of China’s internal economic development, full employment and social progress. Chinese investment through joint ventures and financing appears as the cure for Latin America infrastructure pandemic. Careful attention should be paid to the structural change in the global system provoked by the abandoning of the traditional U.S. leadership role and the rise of China

For further information you can contact:

Carlos E. Alfaro at cealfaro@alfarolaw.com