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China can help shore up economy of Argentina

By Diego Laje | China Daily Global | Updated: 2019-12-23 09:43
Argentina's President Alberto Fernandez speaks on stage outside the Casa Rosada Presidential Palace after inauguration, in Buenos Aires, Dec 10, 2019. [Photo/Agencies]

Argentina's new president, Alberto Fernandez, has a most challenging task ahead: to bring some kind of economic order, which has eluded the country for a century or so. But this time around, there is a new and significant actor at play: China.

China is set to emerge as a key factor in securing the economic order. The world's second-largest economy is Argentina's main trading partner, with trade worth $16.5 billion in 2018, according to official Argentine figures. About two-thirds of that is exports to China.

In 2018, China bought 20 percent more from Argentina than the previous year, and industry analysts expect this growth rate to stay positive.

Argentina's economy is expected to shrink 3.1 percent this year, and inflation is likely to be above 54 percent, according to International Monetary Fund forecasts.

The country's debt-to-GDP ratio has spiked to 93.3 percent. Spiraling inflation, debt, economic life support from the IMF and taxes, which add up to about 30 percent of the GDP, leave few options for an economy that has already defaulted on $93 billion of its debt in 2001.

Despite the default, the IMF helped the country in 2018 with the biggest bailout in its history to the tune of $57 billion. Political support within the IMF is one of the keys to avoiding a second default in less than two decades.

The new government faces two big constraints. First, the electoral base of Alberto Fernandez comes from his new vice-president, a firebrand populist known for lavish handouts. Second, the entire region has seen an epidemic of protests centered around social inequality, as well as calls for more and better programs and subsidies.

The current political environment, both in the country and in the region, makes it almost impossible for Argentina, on its own, to reach the economic order it sorely needs.

Fernandez's Justicialist Party has governed Argentina for most of the recent decades. Founded by populist general Juan Peron in the 1940s, it has traditionally stood for workers' rights.

This closeness with labor activism may be among the main administration assets that helped it secure support of the 35 percent of Argentines in poverty and the 10 percent who are currently unemployed.

Significant investment, the kind China has been known to make in economies around the world, could help shore up Argentina's economy. There are major infrastructure projects under construction, and one of the key projects is a direct result of the China-Argentina partnership.

Two hydroelectric dams in the country's southern region of Patagonia and a new tunnel connecting Argentina and Chile have placed China's Gezhouba Group, a construction company, at the center of infrastructure investment in the country. This makes it one of the few international companies expanding in the country.

For years, Argentina has tried to use high-visibility projects to attract investment, but since the 2001 default, few besides China have been willing to dive in.

The capital that such investment can bring to bear, and the spinoff effects of the jobs the infrastructure projects may generate, will be key to any plan the new government may have to expand the economy rapidly.

The Justicialist Party's traditional approach to the economy is to expand handouts and entitlements. The question of how to pay for those handouts has typically been left for another day.

During the last commodities boom at the beginning of the decade, then President Cristina Fernandez ramped up fiscal spending by about 50 percent. Much of that money went to poverty alleviation programs with limited long-term effects.

These programs were funded by export taxes on soybeans and other agricultural commodities commanding sky-high prices.

Those extraordinary revenues are not available now, even if China has been expanding purchases of Argentina's soybeans, other agricultural products and meat after approvals in the middle of this year.

Lithium and gold have been two of the stellar mining products for Chinese companies. Over 20 percent of total investments in the sector has come from China, according to industry figures.

The new president will have to balance competing and contradictory forces during his tenure. The country needs economic order and concrete steps to expand its economy in both the short and long terms. The bilateral relationship with China will be one of the keys to ensuring it can manage this balancing act.

The author, based in Argentina, is a contributing editor to editorial services consultancy Bahati Ltd. The views do not necessarily reflect those of China Daily.

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