Argentina ponders BRI endorsement amid tricky debt restructuring

Argentina could become the biggest economy in Latin America to join the Belt and Road Initiative (BRI), an action that would allow Alberto Fernández’s heavily indebted government to deepen trade and investment ties with China.

Yet such a move is politically complicated. To solve its external debt Argentina must strike a balance in its relations with both China and the US, its largest creditor.

The country has already sealed a deal with the majority of its foreign private creditors, which have agreed in principle to restructure bonds worth US$65 billion. But with an economy in recession and default, a thirst for investment and foreign exchange, and the need to overcome the economic consequences of the Covid-19 pandemic, Chinese capital would greatly help struggling Argentina.

Forever changing politics

The BRI is Chinese state policy and seeks pragmatic cooperation with Argentina. Launched in 2013, the initiative first sought to revive the ancient Silk Road and maritime trade routes, but has since expanded its scope to improve political and economic cooperation with countries that formally endorse it.

Yet in Argentina, political alignments are forever changing. Bilateral relations with China intensified during the government of Cristina Fernández de Kirchner (2007-2015), but when opponent Mauricio Macri rose to power (2015-2019) he questioned several flagship Chinese projects. That changed when Alberto Fernández took office in December 2019.

Fernández intends to revitalise the relationship and reactivate the controversial Chinese-backed dams in Santa Cruz province, as well as nuclear power plants. However, the government needs first to restructure its external debt with private bondholders, mostly US-based, and renegotiate its US$44 billion debt with the International Monetary Fund (IMF), where the United States has a hugely influential role.

At the negotiating table, China tells Argentina to join the BRI in order to move forward with the projects the country wants

By joining the BRI, Argentina could unlock Chinese finance for vital investment in infrastructure and transport, fossil and renewable energy, mining, manufacturing, agriculture, innovation and information technology. This would enable the country to bridge infrastructure gaps and better integrate with countries such as Chile, which enjoys strong commercial corridors that connect it to foreign markets, thereby lowering logistics costs and enhancing competitiveness.

Diego Mazzoccone, executive director of the Latin American Center for Chinese Political and Economic Studies, which has strong links with the government, said of the BRI that the debt renegotiation “slows the membership down a little”, since “the government needs a good political relationship with the US.”

Mazzoccone said this would likely be overcome however. “For China it’s important that Argentina is not in default, that it can successfully finish negotiating the foreign debt. No investor wants to invest in a country in default.”

Argentina’s foreign ministry acknowledges the global political aspect of joining BRI. A spokesperson told Diálogo Chino that there is the “ intention to study the subject and move forward [with the initiative] there is interest and predisposition” whilst pointing out that all Argentina’s trade agreements rely on a conclusion to the debt renegotiation.

Argentine foreign minister, Felipe Solá, recently told foreign correspondents: “We don’t believe that we should feel compelled to take sides [between the US and China]”, adding that he did not know if the “fight between two giants” would continue after the US presidential elections in November. “We are active spectators.”

The Chinese embassy in Argentina did not respond to requests for comment.

Interest despite a fragile economy

For Argentina and China, the current “comprehensive strategic partnership” between the two countries, a diplomatic status China reserves for few countries, is “extensible to the relationship with the Belt and Road Initiative,” according to a statement signed by Macri and China’s president, Xi Jinping, after the 2018 G20 summit in Buenos Aires.

The wording clearly stops short of a formal BRI agreement and followed warnings by US secretary of state, Mike Pompeo, about the onerous conditions on Latin American countries joining up.

A total of 19 Latin American and Caribbean countries have already joined the BRI, with the notable exceptions of Brazil, Mexico, Argentina and Colombia, the region’s biggest economies. However, Argentina is already a “prospective member” of the Asian Infrastructure Investment Bank (AIIB), the financial pillar of the BRI. Ecuador became the first Latin American member of the AIIB in early 2019.

“Given the state of the bilateral relationship, the fluid dialogue between both leaders and the AIIB membership, it is likely that the Fernández administration will change its position on BRI,” said Jorge Malena, director of the Executive Program on Contemporary China at the Universidad Católica Argentina.

“There are a series of political and economic signs that demonstrate the unbeatable state of the bilateral relationship. Therefore, joining up to the initiative could be a next step forward,” he added.

Since March, China has cooperated with Argentina in the fight against Covid-19 and in April it displaced Brazil as the country’s main trading partner. In November, Argentina is set to participate as a guest of honour at the China International Import Expo in Shanghai.

In July, China also renewed one of its two currency swaps with Argentina, which together are worth US$18.5 billion, boosting reserves in the Argentine Central Bank to $43.3 billion.

Argentina remains locked out of international capital markets and there are expectations of currency devaluation as access to official exchanges is restricted. In June, inflation was up 42.7% year-on-year, but worse is expected. The UN’s Economic Commission for Latin America and the Caribbean (ECLAC) expects Argentina’s GDP to contract 10.5% this year.

Financing and political ties

Emma Fontanet, a manager at the department of international trade promotion at the ICBC Foundation, connected to the Industrial and Commercial Bank of China, said Argentina joining BRI would be positive: “The signing of the Initiative would be a signal that would allow us to further strengthen ties to develop trade, investment and technology exchange.”

For a country its size, Argentina has a small internal market due to its relatively few inhabitants. For Fontanet, the only way to achieve genuine growth is by exporting and securing investment and China plays a very relevant role. The relationship must be “encouraged” while “adding more value to it”, she said.

With Argentine companies struggling to access finance, Chinese buyers will partly pay for products before they’ve been produced, explained Fontanet. Chinese importers often accept paying 30-40% in advance and the rest when they receive the product, as is the case today with some Argentine meat.

For some of the large investments in Argentina, China provides financing that is then repaid with the profits obtained, such as the energy generated from dams. The AIIB is important for financing BRI projects. In Argentina, projects are funded by the Industrial and Commercial Bank of China (ICBC), policy banks Exim Bank and the China Development Bank, and the Bank of China.

“At the negotiating table, China tells Argentina to join the BRI in order to move forward with the projects the country wants,” Mazzoccone said. “But Argentina is in a context of debt negotiation. It wants to look good with the US [in order] to negotiate the debt and it is not making progress on these projects, which are strategic for China, but which the US does not want Argentina to do”.

Malena agreed: “As the US and China compete for the status of world leader, not only is there competition for trade and technology, but also for allies. For Argentina, the most beneficial [position] would be to promote fluid ties with both, maintaining a pragmatic equidistance.”

Whoever is best placed to help Argentina meet its development needs, politics seems to be back in a big way. The recent appointment of a Kirchnerista in the Argentine embassy in Beijing shows the government’s desire to build the relationship. Sabino Vaca Narvaja, the special representative for trade promotion and investments in China, told the state news agency Télam: “It is important that we recover the spirit of the strategic cooperation agreements signed during the government of Cristina Kirchner in February 2015.”