Argentina crisis challenges China loan repayments

Less than two weeks from presidential elections, Argentina is facing a new economic crisis that severely challenges its ability to repay foreign lenders, including China – its fourth largest – which has issued US$16.9 billion in loans from 2007 to 2018, according to the Inter-American Dialogue.

With scant means of servicing the country’s debt, including payments of US$52 billion due next year, President Mauricio Macri ends his term with Argentina on the brink of default, which also has consequences for repayment of the Chinese loans.

“China has shown patience with Argentina’s political and economic shifts and will likely continue to do so,” said Bruno Binetti, fellow at the Inter-American Dialogue. “They want to keep looking for strategic resources for the medium-term and they contemplate the short-term shocks when making an investment.”

Shunned by international markets following a 2001 default and disputes with US-based hedge funds, Macri’s predecessor Cristina Fernández de Kirchner, who is August primaries winner Alberto Fernández’s running mate, turned to China. She secured much-needed investment in infrastructure, energy and transportation from China’s state-owned policy banks.

However, critics, who included Macri, warned of tying Argentina to inordinately expensive infrastructure projects that would limit the country’s future policy choices.

Key loans

Over the past decade, Argentina secured Chinese funds for eleven projects, including railways, solar energy, nuclear energy and dams, mainly through the Export Import Bank of China (China Exim) and China Development Bank.

The country also benefited from a US$19 billion currency swap, which helped bolster Central Bank foreign currency reserves that have dropped by US$28 billion in the past six months.

“China has become one of the most relevant creditors for Argentina,” said Leonardo Stanley, a researcher at Argentina’s Center for State and Society Studies (CEDES).

However, Stanley pointed out that multilateral organisations, including the International Monetary Fund (IMF), with whom Macri agreed a record US$57 billion bailout package in August, remain the largest.

One of the most significant China loans was for 85% of the cost of constructing two hydroelectric dams in Patagonia, at a cost of US$4.7 billion. The project was awarded in 2013 and construction began in 2015 but then stalled due to environmental groups’ concerns over unsatisfactory environmental impact studies.

Lender China Development Bank included a loan clause that made other infrastructure projects in Argentina conditional on the approval of the dams. Aware of this, Macri gave them the green light, albeit at a reduced scale.

Chinese lenders afforded similar flexibility on a US$10 billion loan to build a nuclear complex consisting of two plants. Macri froze the 2015 deal on taking office amid doubts over the current and future affordability of nuclear energy.

China wants to make sure that some of the loans are paid back before the change of administration

Again, he eventually approved the project but downsized to one plant. Despite these setbacks, Chinese investors continue to seek opportunities in Argentina.

“When I ask Chinese companies why they come here with such a difficult financial situation, they always say the same thing. They invest abroad always thinking of the long-term, so they are not worried about not being paid,” said Ernesto Fernández Taboada, head of the China-Argentina chamber of commerce.

Learning curve

China’s lending to Latin America also has geopolitical motives, according to economist Ariel Slipak, who said Chinese firms seek access to key primary resources and hope to secure markets for their products.

“China adapts to the political characteristics of each country and has shown flexibility. They are going through a learning curve, learning how to insert themselves in the region.”

Aside from mega-projects, China is also mobilising resources for less expensive ventures that are quicker to execute. Some also help the country to increase the share of renewables in its oil- and gas-heavy energy matrix.

Such is the case of Cauchari, a solar plant in the northern Argentine province of Jujuy. China Exim Bank agreed to fund the project’s US$390 million total cost in 2016. The plant is set to start generating energy from next month.

“China wants to make sure that some of the loans are paid back before the change of administration, so they are now exploring more short-term projects. It’s part of their learning process,” Binetti said.

No strategy

While the loans enabled otherwise unfeasible projects, they concentrated Argentina’s debt obligations to China on big projects that take a long time to provide returns.

Moreover, Argentina agreed to build large dams and nuclear plants with no long-term strategy for the energy sector or assessment of the costs of different energy sources, former energy secretary Jorge Lapeña told Diálogo Chino.

Agreements like these limit Argentina’s policymaking autonomy. We need a proper energy strategy

Lapeña and a group of other ex-energy secretaries claimed political ties, rather than sound economics, were responsible for the approval of the China-backed projects under Fernández de Kirchner.

“Projects are now decided based on political convenience. Then we have to deal with the problems when they have to be implemented.”

Argentina’s energy ministry, which was downgraded to the status of secretariat in 2018, showed in a 2017 study that the cost of a generating a kilowatt (KW) of nuclear energy is 4.8 times higher than it is for wind power and 6.6 times higher than solar.

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“Agreements like these limit Argentina’s policymaking autonomy. We need a proper energy strategy in which the state has a significant role,” Lapeña said.

Looking ahead

Alberto Fernández, late president Néstor Kirchner’s cabinet chief, is odds on favourite to become the next president after winning 47% of the vote in the primaries. Macri earned just a 32% vote share.

Should Fernández win, it will likely mean deepening ties with China, which Macri was hesitant to entrench amid US warnings about China’s ‘predatory’ activity in Latin America.

“China knows who they will be dealing with if Fernández wins,” Slipak said.

A Fernández administration could expedite projects delayed under Macri, or even negotiate new ones. The currency swap deal could also be expanded in an effort to relieve Argentina’s debt payments.

Fernández recently suggested that Macri, who claimed he would attract investment from international lenders only to return to China, had not appreciated its role as a reliable foreign investor.

“We seek a respectful and serious relationship with China,” he said.