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Rebecca Ray, Kevin P. Gallagher
August 5, 200 to August 11, 2020
Latin America faces 3 dangerous crises. The region is now the epicenter of the Covid-19 pandemic and is expected to have the worst economic functionality in the world. As if these two crises were not enough, their combination has an effect on the threats to exacerbate the ongoing environmental devastation, especially in the Amazon basin, and climate impacts. Although China is a relatively minor component of the problem, it deserves to be a component of the solution.
If Latin America sneezes when the United States catches a cold, what happens when the world is facing a global pandemic?
Latin America and the Caribbean (LAC) has been more affected by Covid-19 than by other causes. At the time of writing, six of the 10 countries most affected, measured through the proportion of population that succumbed to the virus last week, are in the LAC region: Peru, Bolivia, Brazil, Colombia, Chile and Mexico. are found in the 20 most affected countries: Guatemala, Argentina, Ecuador and the Dominican Republic.
The resulting economic pain is difficult to overestimate. The IMF now expects the region to revel in the world’s worst economic functionality this year, predicting an economic decline of 9% and a decline as serious as 10% in Mexico. As LAC governments commit to transferring their savings in this painful year, they also face a dizzying increase in debt service payments, even if they are not indebted.
The explanation of why it is simple: a maximum of LAC countries cannot borrow in their own currency. Its debt point is based on the price of the dollar. When investors feel volatile and “take refuge in a safe place” by promoting their foreign exchange holdings in LAC, dollars become more expensive. This also applies to existing dollar-denominated debt, which can skyrocket in proportion to the local economies of LAC countries.
Both crises exacerbate persistent environmental problems, namely fires in the Amazon basin. This year is expected to cause record or near-record fires in the world’s largest rainforest. Last month the number of fires in June was recorded in the Brazilian Amazon since 2007. In addition, dry climate situations in the western and southern Amazon basin countries, Peru and Bolivia, are also preparing “generalized” fires.
The fact that these situations occur in a year of economic crisis, when governments face painful budget cuts to avoid debt crises, raises the specter of reduced execution budgets that cannot cope with the rate of environmental damage. To make matters worse, smoke from fires in the Amazon is expected to exacme the number of Covid-19 victims in the already affected region. Debt relief is a very important component of managing not only the economic crisis, but also environmental and fitness crises at the same time.
In the longer term, the pandemic and the resulting economic crisis are jeopardizing the region’s climate adaptation and mitigation plans. Debt relief, whether multilateral, bilateral or with bondholders, is a very important detail for safeguarding the weather fight in the region. For example, green energy projects have a tendency to charge more for installation, but with a lower long-term charge. Therefore, a short-term economic crisis would possibly make such investments more difficult to justify, even if they were more mandatory in the long run.
More than anything, LAC wants the tax (or budget) area to handle the virus well and organize a full recovery. Unfortunately, tax area is limited due to the huge amount of dollar-denominated debt that countries owe to their creditors. While debt relief projects have begun on three fronts: multilateral, bilateral and with bondholders, progress has faltered and given a great respite to the LAC region.
China can play a leading role in providing much-needed assistance in the region.
At the multilateral level, a new IMF special drawing rights factor (SERDs are the IMF’s unit of account that can be used to pay other central banks and some foreign institutions) would be useful. In addition to significant debt relief for personal and bilateral creditors. Unfortunately, the United States and personal creditors have blocked SCC efforts and broader debt relief for low- and middle-income countries, the category that includes Latin American countries to the fullest, and the personal sector.
The G20 took a small step in the right direction by joining the G20 Debt Service Suspension Initiative (DSSI), which would suspend debt bills for the rest of the year to about 73 of the world’s poorest countries. Unfortunately, most LAC countries are middle-income and eligible for ISD.
There is a tendency to point to China as the source of the problem, arguing that China is practicing “debt trap diplomacy” that pushes countries into debt. China is a component of the problem, yet focusing only on China is lost. There are some countries whose debt to China stands out, but if personal bondholders also do not take part in debt relief, any action through China would benefit them, that the peoples of Latin America and their economies.
Only six LAC countries are eligible to participate in the G20 ISD. Of these, only two, Guyana and St. Vincent and the Grenadines, have the bulk of their bilateral debt to China.
Debt relief from china or other creditors can be an aid, but it also comes at a cost. Sovereign rating agencies lower the rating of countries involved in debt relief, which can cause even greater economic suffering. No wonder that of these six countries, only one, Guyana, participates.
However, even by participating in the ISD, Guyana will not necessarily gain advantages from China’s debt relief. According to the Financial Times, the Development Bank of China is not considered an official bilateral creditor. As such, you will not participate in the DSSI. At the time of writing, no public data are available on the participation of the Export and Import Bank of China (the largest Chinese creditor in Guyana). As national advance and policy banks, they deserve to subscribe to this effort, along with their peers KfW (Germany) and JICA and JBIC (Japan).
Guyana, Ecuador, Jamaica and Venezuela are highly exposed to China. China accounts for a larger share of its foreign debt and its main official bilateral creditor.
Latin America is already feeling the effects of a weak G20, as creditors continually reject Argentina’s and Ecuador’s bona tiestric restructuring proposals. This has led China and other creditors to rightly point out that it would be unfair for China to grant debt relief only to borrowing countries and then use that budget to pay personal bondholders in the West. The budget will be used to manage the fitness crisis and organize a sustainable recovery.
The biggest challenge for the region, which the G20 has so far failed to control, is the personal sector. The graph below shows that official bilateral debt accounts for only 6% of overall notable debt (China is the largest bilateral debtor in this category). Most of it is owned by personal bondholders and advertising banks. This is largely due to the challenges of corporate bonds in Latin America and foreign investors in the West, driven by low interest rates in the United States and quantitative easing following the 2008-2009 currency crisis.
To China’s credit, he pressured the IMF and the G20 to increase the IMF’s special drawing rights in April and last month at the IMF. This resolution would have brought immediate relief to many Latin American countries, only to the poorest. Unfortunately, the United States and India have blocked this effort.
Latin America wants SCC and debt relief from bilateral creditors and, above all, from the personal sector. Without this effort, no foreign actor is encouraged to participate. This will require multilateralism. But time is running out and China has little influence on the G20 and imf.
If China acts bilaterally, it can force borrowing countries to spend the aid budget to attack the virus and embark on a socially inclusive, low-carbon recovery. China’s leadership can simply motivate others to follow the game.
This article was first published on our sister site Chinese Dialog.
We inspire you to republish Articles from the Chinese Dialogue, online or in print, the Creative Commons license. To get started, read our republishing commands.
Rebecca Ray
Rebecca Ray is a postdoctoral fellow in the Global Economic Governance Initiative at Boston University’s Global Development Policy Center. She is the leader of a new study: Standardizing Sustainable Development? Development banks in the Andean Amazon.
Kevin P. Gallagher
Kevin P. Gallagher is a professor and director of Boston University’s Center for Global Development Policy (GDP Center).
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