{"id":50036720,"date":"2020-08-04T10:01:51","date_gmt":"2020-08-04T09:01:51","guid":{"rendered":"https:\/\/stage.dialogochino.net\/?p=36720"},"modified":"2023-03-13T21:14:10","modified_gmt":"2023-03-13T21:14:10","slug":"36720-china-alone-cant-solve-latin-americas-looming-debt-crisis","status":"publish","type":"post","link":"https:\/\/dialogue.earth\/en\/business\/36720-china-alone-cant-solve-latin-americas-looming-debt-crisis\/","title":{"rendered":"China alone can\u2019t solve Latin America\u2019s looming debt crisis"},"content":{"rendered":"

Latin America is facing three perilous crises. The region is now the epicentre<\/a> of the Covid-19 pandemic and is projected to have the worst economic performance in the world. As if these two crises weren\u2019t enough, their combined impact threatens to worsen ongoing environmental devastation, especially in the Amazon basin. Though China is a relatively smaller part of the problem, it should be part of the solution.<\/p>\n

2020\u2019s triple crisis and the urgent need for debt relief<\/h2>\n

If Latin America sneezes when the US catches a cold, what happens when the world struggles with a global pandemic?<\/p>\n

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6<\/p>\n

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\nof the 10 countries worst hit by Covid-19 are in Latin America and the Caribbean
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Latin America and the Caribbean (LAC) has been more affected by Covid-19<\/a> than anywhere else. As of this writing, six<\/a> of the 10 worst-hit countries \u2013 measured in the share of the population that has succumbed to the virus in the last week \u2013 are in the LAC region: Peru, Bolivia, Brazil, Colombia, Chile, and Mexico. Four more are in the hardest hit 20 countries: Guatemala, Argentina, Ecuador, and the Dominican Republic.<\/p>\n

The resulting economic pain is hard to overstate. The IMF now expects the region to experience the worst economic performance<\/a> in the world this year, projecting economic decline of 9% and a drop as severe as 10% in Mexico. While LAC governments are trying to see their economies through this painful year, they are also facing ballooning debt service payments \u2013 even if they don\u2019t take on new debt.<\/p>\n

The reason for this is simple: most LAC countries cannot borrow in their own currency. Their debt levels depend on the value of the dollar. When investors sense instability and \u201cretreat to safety<\/a>\u201d by selling off holdings of LAC currency, dollars get more expensive. This also applies to existing dollar-denominated debt, which can skyrocket as a share of LAC countries\u2019 local economies.<\/p>\n

These two crises exacerbate ongoing environmental problems, particularly burning in the Amazon basin. This year is expected to bring record<\/a> or near-record fires<\/a> in the world\u2019s largest rainforest. Last month saw the highest number of fires for any June in the Brazilian Amazon since 2007. Furthermore, dry weather patterns in Western and Southern Amazon-basin countries Peru and Bolivia are setting the stage for \u201cwidespread<\/a>\u201d fires there too.<\/p>\n

If China acted bilaterally it could require borrowing nations to spend the relief funds to attack the virus and embark on a recovery that is both socially inclusive and low carbon<\/p><\/blockquote>\n

The fact that these conditions are coming during a year of economic crisis, when governments are facing painful fiscal cuts to stave off debt crises, raises the spectre of slashed enforcement budgets that can\u2019t cope with the rate of environmental damage. To make matters worse, smoke from Amazon fires is expected to exacerbate the Covid-19 toll<\/a> in the already hard-hit region. Alleviating the debt burden is a crucial part of managing not only the economic crisis, but also the simultaneous health and environmental crises.<\/p>\n

Longer term, the pandemic and ensuing economic crisis jeopardise the region\u2019s plans<\/a> for climate change mitigation and adaptation. Debt relief \u2013 whether multilateral, bilateral, or with bondholders \u2013 is a crucial element in safeguarding the region\u2019s climate fight. For example, green energy projects tend to cost more to install, but cost less in the long term<\/a>. So, a short-term economic crisis can make those investments harder to justify even as they become more necessary in the long-term.\u00a0<\/em><\/p>\n

More than anything, LAC needs the fiscal (or budgetary) space to effectively manage the virus and mount a comprehensive recovery. Unfortunately, fiscal space is tight because of the large amount of dollar-denominated debt countries owe their creditors. While debt relief initiatives have begun on three fronts \u2013 multilateral, bilateral, and with bondholders \u2013 progress has faltered and has not offered LAC much respite.<\/p>\n

China can play an important leadership role in bringing much-needed help to the region.<\/p>\n

Multilateral liquidity and debt relief<\/h2>\n

In the multilateral arena, a new issuance of IMF Special Drawing Rights (SDRs are the IMF\u2019s unit of account that can be used to pay other Central Banks and certain international institutions) would really help. As would significant debt relief from private and bilateral creditors. Unfortunately, the US and private creditors have blocked<\/a> efforts on SDRs and broader debt relief to lower and middle income countries \u2013 the category that includes most Latin American countries \u2013 and the private sector.<\/p>\n

The G20 has taken a small step in the right direction by establishing the Debt Service Suspension Initiative (DSSI)<\/a> that would provide a suspension of debt payments for the rest of the year to approximately 73 of the world’s poorest countries. Unfortunately, most LAC countries are middle-income and do not qualify for DSSI.<\/p>\n

Bilateral debt relief<\/h2>\n

There is a tendency to point to China as the source of the problem. China is part of the problem but to focus solely on China misses the point. There are some countries whose debt to China stands out, but if private bondholders don\u2019t participate in debt relief too then any action by China would serve to benefit them, rather than Latin American people and their economies.<\/p>\n

Just six LAC countries are eligible to participate in G20s DSSI. Among them, only two \u2013 Guyana and St. Vincent and the Grenadines \u2013 owe the majority of their bilateral debt to China.<\/p>\n

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\"Table
Source: World Bank: https:\/\/www.worldbank.org\/en\/topic\/debt\/brief\/covid-19-debt-service-suspension-initiative<\/figcaption><\/figure><\/p>\n

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Bilateral debt relief \u2013 from China or from other creditors \u2013 can be a crucial help, but it also comes at a cost. Sovereign credit rating agencies downgrade countries that participate in debt relief, which can cause even greater economic pain. It should come as no surprise that of these six countries, only one \u2013 Guyana \u2013 has participated.<\/p>\n

However, even by participating in the DSSI, Guyana will not necessarily receive debt relief from China. According to the Financial Times<\/a>, China Development Bank is not considered an official bilateral creditor. As such, it will not participate in the DSSI. There is no publicly-available information as of this writing about whether the China Export-Import Bank (Guyana\u2019s most important Chinese creditor<\/a>) will participate. As national development and policy banks, they should join this effort, together with their peers the KfW (in Germany) and JICA and JBIC (in Japan).<\/p>\n

Guyana, Ecuador, Jamaica and Venezuela, have a large exposure to China. China is a greater part of their general external debt and their largest bilateral official creditor.<\/p>\n