China is becoming “increasingly wary” of investing in Argentina as it struggles with slowing growth, inflation, and a worsening relationship with the United States.
Xiang Songzuo, chief economist at the state-run Agricultural Bank of China, told Emerging Markets that Beijing had become “more and more cautious about investing in Argentina, both directly [in state-to-state transactions], and in terms of purely equity deals”.
Xiang also highlighted the “potential political risk” of investing in a country that remained mired in a war of words with the United States about how to restructure its foreign debt. “We are worried about dealing with countries that have clear tensions with the United States,” he added.
The INDEC statistics bureau tips the economy to shrink by 0.5% this year, with a similar contraction eyed for 2016. Argentina’s currency slumped 23% against the US dollar in 2014, while inflation remains at eye-watering levels: private estimates place the true level of consumer price inflation at close to 40%.
Another concern remained the low levels of transparency and conditionality placed on cheap loans extended by Beijing to Buenos Aires. “Many Chinese experts have begun to complain about that. We need to ensure that, more and more, we place the right conditionalities on loans to the country,” he said.
So far, however, China has been willing to seek ways to placate one of its key Latin American allies. In January, Argentina’s central bank boosted its reserves by $400m after securing the fourth instalment of an $11bn currency swap agreed with the People’s Bank of China.
Currency controls
The mainland is now Argentina’s second largest trading partner after Brazil with $17.5bn in total bilateral commerce in 2013, though in recent times a few industrial tie-ups, notably an alliance between China’s Sinopec and Argentina’s YPF, have been signed.
Few expect Argentina’s economy to improve any time soon. The country faces the pressing need to find a workable solution to the wrangle over a $1.3bn debt repayment that tipped the country into default in June 2013. Argentina remains locked in a battle with a group of US hedge funds that stretches back to its record 2002 default.
The standoff has choked off investment in an economy burdened by swingeing trade and currency controls. Then there are fears that the country’s fortunes have yet to hit rock-bottom.
Kevin Daly, senior investment manager, emerging market debt at Aberdeen Asset Management, expects 2016 to be worse than 2015. A new cadre of leaders, set to replace Cristina Fernández de Kirchner as Argentine president when she leaves office following general elections in October, is likely to face a battle to tamp down inflation while shoring up a battered economy.
Jan Dehn, head of research at emerging market-focused Ashmore Investment Management, describes the country’s economy as “structurally wrong”, and requiring the sort of medical help that “only a regime shift can produce”.