Many of the economies in Latin America are overly-dependent upon commodities, such as: oil; metals; agricultural products; raw materials; etc. Since none of their currencies are “hard” (tradable in global markets), this means that they are very reliant on their export revenue to acquire the necessary funds to, in turn, finance their imports.
Aside from the well-known decline of the price of oil on global markets, the price of just about every other commodity has dropped significantly. as well. Besides financing its imports, however, this export revenue is also necessary to fund the various social programs, which are important for the government to help it retain power by keeping the masses satisfied.
The overall economy of Latin America–on a country by country basis–desperately needs to diversify their respective economies in order to avoid the cyclical commodity roller coaster. Now, here’s where China comes in. President Xi Jinping has traveled–far and wide–in Latin America, waving his huge wad of “greenbacks”. The government-owned Chinese banks are following in his path, and offering substantial loans; but, they seem to mostly finance the commodity-related projects.
China’s “helping hand” is obviously intended to help China, since they are tying these loans to financing commodities, which China has a huge on-going appetite for. That means that China’s Dollars will not be available to improve Latin America’s much needed infrastructure projects, such as: education; health care; housing; water and sewer facilities; roads; mass transportation, etc.
Lenders should always have every intention of receiving a timely repayment of the loans. The Chinese banks, in this case, have been financing projects that: are not of a high priority to the borrowers; where the willingness of the respective borrowers to repay the project financed may be highly questionable; and where the willingness of the borrowers to shift assets from necessary programs to repay the Chinese loans is suspect, as well.
These loans from China would be more welcome if they were being made to diversify Latin America’s overall economy into: high-end manufacturing; technology; and innovation. That way, the economies of the Region could move beyond the low-paying, labor-intensive industries and into those of the higher-paying ones. That would indeed enhance the overall economy of Latin America. Just think, how does anyone repay a loan, denominated in a strong currency, with revenue that is subject to an unstable commodity?
But, here’s the clincher: Back home, government-owned Chinese banks are known to have large proportions of their loans which are not being repaid. Also, the loans to Latin America do not even have any specified repayment dates, and are not known to have a “default clause” (that we know of). That clause would enable any creditor to declare a loan to be immediately terminated and payable, in the event the borrower defaults on any other loan(s). So, might the various Latin American administrations merely intend to pass the repayment responsibility on, from one administration to the next, and so on…?