Peso Hits Historical Low as Argentina Contemplates Joining Belt & Road Initiative

The Argentine peso fell further to breach 73.80 against the greenback, the lowest level documented, after the country’s central bank president Pesce opined that the restructuring agreement with creditors should minimize the necessity for additional currency exchange prohibitions and assist in slashing the huge gap between the official and black market exchange rate. Ten days back, the government rolled out its altered bond restructuring proposal and set a timeline of August 28 for approval by creditors. Argentina, for the ninth time in its history, failed to pay interest on time. Most recently, the country failed to make a timely payment of $500 million to its creditors.

In June, for the fourth successive time, the country’s retail sales plunged 82.2% y-o-y, following a decline of 92.9% in the earlier month. Obviously, the steep decline was due to Covid-19 pandemic. While entertainment industry recorded a decline of 100% in June, a decrease similar to May, clothing sales fell 73.6% in June, following a decrease of 96.8% in the prior month. Electronics equipment & computers posted 83.8% drop in June, compared with 96.1% slump in May.

The country’s GDP contracted 12.3% y-o-y in June, following a record contraction of 20.5% in May, but slightly better than economists’ estimates for a 14% decrease. Manufacturing output declined at a slower rate of 7.3% in June, compared with a drop of 25.5% in May. Construction sector posted a decrease of 41.9% in June, following a 61.8% drop in the earlier month. Restaurant & lodging services recorded a 62.7% fall in sales, compared with 72.4% in May. Likewise, mining & quarrying sales fell 15.5% in June, following a 20% drop in the prior month. The economic activity, notably, increased 7.4% m-o-m in June, following a 9.7% rebound in May.

Argentina’s trade surplus widened to $1.476 billion in July 2020, from $950 million in the comparable period last year and surpassed anticipations for a surplus of $1.20 billion. While imports plummeted 30.1% y-o-y to $3.427 billion, primarily due to a 51.6% decline in purchase of transport material, 24% drop in capital and 54.8% slump in gasoline. Exports decreased 16.3% to $4.903 billion, as shipment of industrial goods decreased 32.3%, oil and energy by 20.3% and other primary goods by 10%.

To overcome the financial trouble, Argentina is looking at the option of joining the Belt and Road Initiative (BRI) of China, paving way for deepening of trade and investment relationship with China. Nevertheless, the move contemplated by Alberto Fernández’s government is easier said than done. To address external debt issues, Argentina must reach an equilibrium with both the US and China. It should be remembered that the US is Argentina’s largest creditor.

The country has inked an agreement with almost all of its overseas private creditors who have accepted to restructure bonds worth over $65 billion. With the economy struggling to rebound (country is officially in recession due to two consecutive quarters of contraction), there is a dire need for investment and foreign exchange. That is where Chinese investments could greatly assist the country.

The BRI is a China backed project aiming to revive the old age Silk Road and sea trade routes. However, beyond trade, the initiative intends to enhance political and economic cooperation with countries that officially accept and joint the project.

However, in Argentina, political shuffling continues to happen frequently. Ties deepened during Cristina Fernández de Kirchner’s (2007-2015) period, while things did not go smoothly when Mauricio Macri was at the helm (2015-2019) as he had severe difference on multiple flagship Chinese ventures.

By officially joining the BRI, Argentina will receive the much needed investment in transport and other infrastructure, mining, fossil and sustainable energy, agriculture, manufacturing, information technology and innovation. This would pave way for the country to fill infrastructure gaps and better link it with neighboring countries such as Chile, which has established robust commercial routes connecting it to overseas markets, thereby bringing down logistics expenses and improving the ability to compete.

However, an official BRI deal is not easy as the US secretary of state, Mike Pompeo has warned of the arduous situation of 19 Latin American and Caribbean nations which have joined the venture. So far, Brazil, Argentina, Mexico and Colombia have refrained from joining the BRI project. Nevertheless, Argentina is currently a “prospective member” of the AIIB (Asian Infrastructure Investment Bank), the financial underwriter of the BRI. Ecuador was the first Latin American country to become member of the AIIB in the beginning of 2019.

Back in March, China has partnered with Argentina in the battle against Covid-19 outbreak. A month later, it pushed back Brazil to become Argentina’s largest trading partner. This November, Argentina will participate as a honorary guest at the China International Import Expo to be conducted in Shanghai.

Last month, China also renewed a currency swap with Argentina. Overall, China had extended two currency swaps worth $18.50 billion to Argentina, increasing the country’s reserves to $43.30 billion. Argentina has no way to access global capital markets due to poor financial situation and investors believe that currency devaluation will happen soon as access to official exchange rate is severely restricted. In June, inflation shot up to 42.7% y-o-y and things are expected to become worse.

To sum it up, Diego Mazzoccone, executive director of the Latin American Center for Chinese Political and Economic Studies, which is maintain a healthy relationship with the government, stated “At the negotiating table, China tells Argentina to join the BRI in order to move forward with the projects the country wants. But Argentina is in a context of debt negotiation. It wants to look good with the US [in order] to negotiate the debt and it is not making progress on these projects, which are strategic for China, but which the US does not want Argentina to do.”