Paying Beijing

Short-term lifeline, long-term fiscal headache.

In recent decades, China has emerged as the leading creditor to Latin America. Beijing’s approach to lending money does not come with the same kind of conditions – ideological or fiscal – that are often pushed hard for by western institutions such as the World Bank, IMF and Inter-American Development Bank.

A senior official at Mexico’s Treasury Secretariat explained that the country’s ties with China have developed significantly in recent years, “During the presidency of Enrique Peña Nieto and in the current administration, influence has grown, particularly on the side of investment in infrastructure, interest in supporting large strategic projects has grown a lot. The cooperation has deepened quite a bit, especially around medical issues and as a result of COVID even more.”

“During the presidency of Enrique Peña Nieto and in the current administration, influence has grown, particularly on the side of investment in infrastructure, interest in supporting large strategic projects has grown a lot.”

Senior official, Treasury Secretariat, Mexico

Indeed, China was the first country to heed Mexico’s call for support to deal with the health emergency, not only the exchange of equipment and medicines but even the supply of vaccines. Health collaboration continues apace and a Chinese economic support package is being prepared to continue the supply of vaccines, Cansino and Sinovac were the main suppliers for mass inoculation.

Venezuela, Brazil, Ecuador, Argentina and Bolivia are, in that order, the countries that today accumulate the greatest indebtedness with China, together amounting to some USD 134 billion. Being a little far from traditional capital markets has led these countries to seek financing from China, which has provided a viable alternative for financing demands.

An economist and consultant to the government of Panama explained, “China is offering financing that could have a source of payment in goods and services. This arrangement consists of the borrower transferring a set of assets, for example oil, that it does not currently have but that expects to have in the future – securitisation of future flows.”

“China is offering financing that could have a source of payment in goods and services. This arrangement consists of the borrower transferring a set of assets, for example oil, that it does not currently have but that expects to have in the future – securitisation of future flows.”

Economist and government consultant, Panama

This means that if a country wants to securitise its future sales of oil or other commodity or goods and services, what it does is that it requests the loan and organises a schedule and depending on the debtor country, the commodities are produced, these are quoted at the spot price or even a pre-agreed price and these commodities manage to pay the quota or the coupon for the service of the debt.

With such arrangements on offer it is little surprise that Ecuador earlier this year proposed to renegotiate its debt obligations to Beijing – the country currently owes China some USD 5.2 billion. The visit to Beijing by president Guillermo Lasso also emphasised Ecuador’s desire to sign new trade agreements with China which is Quito’s largest creditor in terms of inter-country debt with 12% of the total.

We expect other Latin American countries will follow suit.

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