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Announcement:

Moody's: Chinese investment benefits Latin American, but also comes with risks

 The document has been translated in other languages

25 Jun 2018

Sao Paulo, June 25, 2018 -- China's investment in Latin America totaled $ 110 billion during 2003 and 2016 and will continue to grow in the coming years, given the region's high-quality raw materials, infrastructure needs and favorable demographics, Moody's Investors Service says in a new report. But while increased Chinese investment in the region brings growth opportunities, particularly for smaller countries, it also heightens certain risks.

If, at first, Chinese investments in the region targeted natural resources, within years the scope has become increasingly more diverse ranging from raw material to services, including finance. Even though the form of investment varies, being either through FDI or lending, the flow of resources from China to Latin America continues to increase, with different impacts across the region.

"Chinese lending to Latin American governments and state-owned entities has benefited particularly countries with limited access to funding," says Marianna Waltz, Moody's managing director for Latin American financial corporates. "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".

During 2005-16, China lent about $222 billion to Latin American and Caribbean governments (Brazil alone received 53% of this amount), about half for infrastructure projects and one-third for energy projects, Waltz says. Since 2015, Chinese companies have invested more than $20 billion in electricity, sanitation and transportation sectors across the region, taking advantage of financial distress among local infrastructure groups and governments reining in public spending.

The largest portion of China's Latin American investment goes to Brazil, where Chinese bank loans are used to finance mainly infrastructure, energy and mining projects. The investment reflects an interest in boosting the growth of Chinese companies in Brazil, as well as trade between the two countries. Along with direct investment in M&A or greenfield projects in Brazil, Chinese bank loans also provide some capital inflow.

While Chinese investment represents funding diversity for Latin American countries, for large economies such as Brazil, it won't substantially boost economic growth, though at the regional or subnational level, it could, Moody's says. But there are risks, including debt creation and attendant credit risk where projects funded with debt don't generate sufficient revenue to repay it. Meanwhile, to the extent that projects have an import requirement, funding may go largely toward financing imports, widening current account deficits.

Moody's research subscribers can access this report, "Chinese investment increasingly benefits region, while heightening certain risks," at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113396.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Carolina Chimenti
Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

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