Chinese ‘to increase’ investment in Latin American infrastructure

The People’s Republic’s expansion drive could boost the region’s economy but could also lead to a heavier sovereign debt burden and trade imbalances, Moody’s warns.

The billions of dollars China is investing in Latin America annually is likely to increase over the coming years, which could be a boon to the region but is not without risks, according to ratings agency Moody’s Investors Service.

In recent years, China has sought to expand the reach of its One Belt One Road trade and development initiative to Latin American markets. China’s trade volume with the region rose 18.8 percent last year to $260 billion, according to China’s state-owned Xinhua News Agency.

Moody’s said in a memo to investors that the region’s abundance of raw materials and infrastructure needs ensures China’s investment in furthering trade ties will continue. The ratings agency said around half of the $222 billion China has loaned to Latin American and Caribbean governments has been for infrastructure projects, and a third has been for energy.

One recent example is China Southern Power Grid International’s deal to buy Brookfield Infrastructure Partners’ 27.8 percent stake in Chilean power transmission company Transelec for $1.3 billion. State Power Investment Corporation has also reportedly been in talks to acquire wind and hydro assets from the energy company Latin America Power for up to $400 million.

However, Moody’s said China’s investment does not come without risk to the region. It cited debt creation and projects that fail to generate sufficient revenue as one reason borrowers should be cautious. Moody’s also said China’s interest in developing trade may mean funding will go largely toward financing imports, which would widen current trade deficits.

“Chinese lending to Latin American governments and state-owned entities has benefited particularly countries with limited access to funding,” Marianna Waltz, Moody’s managing director for Latin American financial corporates, said in the memo. “Nevertheless, a dependence on highly discretionary lending introduces potentially adverse elements into the credit profiles of some sovereigns, such as higher debt burdens and weaker trade balances, and therefore increases refinancing risk”.