Bloomberg News

China Lending $1 Billion to Ecuador as Correa Seeks Bond Sale

February 01, 2012

Jan. 24 (Bloomberg) -- Ecuador received a loan commitment from China last month for at least $1 billion, helping finance a budget deficit that’s projected to reach $4.23 billion this year, central bank President Pedro Delgado said.

The South American country also plans to tap international debt markets this year, Delgado said yesterday in an interview at his offices in Quito, in what would be the first global sale since it defaulted on $3.2 billion of bonds three years ago. The government is seeking yields of no more than 7 percent, he said. The yield on Ecuador’s 9.375 percent bonds maturing in 2015 have fallen 105 basis points, or 1.05 percentage point, to 9.29 percent in the past year through yesterday, according to JPMorgan Chase & Co.

“At least $1 billion is covered with financing that was obtained from China at the end of the year,” said Delgado, a 49-year-old economist.

Since Ecuador’s default, the government has borrowed about $7.25 billion from China in exchange for future oil exports, tapped the nation’s public pension fund and raised taxes on companies including oil producers and banks to finance the budget.

Telephone calls to the Chinese embassy in Quito went unanswered after normal business hours yesterday.

Bond Sale

Ecuador is in talks with Hamilton, Bermuda-based Lazard Ltd. and Clifford Chance LLP to structure the bond sale, Delgado said.

“We are working on this very quickly and our goal is for sometime this year,” Delgado said about the timing of the sale. “Everything depends on the market environment.”

No one at Lazard or Clifford Chance responded immediately to messages left yesterday after normal business hours.

Correa probably needs to offer investors higher yields than similar-maturity Argentine bonds, said Michael Henderson, a London-based economist at Capital Economics Ltd.

“Foreign investors are still pretty wary,” Henderson said yesterday in a telephone interview. “They’ll do well to get 9 percent or better, although much depends on the specifics of the offer.”

Delgado declined to provide more details about the planned sale.

Ecuadorean government debt is the third-riskiest after Venezuela and Ukraine among 15 emerging markets tracked by JPMorgan Chase & Co., according to the bank’s EMBI+ indexes.

Oil

The biggest threat to Ecuador is a sustained fall in oil prices as the country’s use of the U.S. dollar as its official currency limits monetary-policy tools to spur growth, Henderson said.

“If prices fall back, which they look set to do, obviously the pace of growth that we’ve seen in the past couple of years isn’t going to be sustainable,” Henderson said.

Correa’s administration, which has raised taxes nine times since 2007, changed its oil laws in 2010 to give the government greater control over crude reserves.

The government cancelled oil and natural-gas contracts with companies, including Brazil’s Petroleo Brasileiro SA and Houston-based Noble Energy Inc. in November 2010 when they refused to sign new contracts allowing the state to take an increased share of profits.

In the following 12 months, crude exports from Ecuador, the Organization of Petroleum Exporting Countries’ smallest member, tumbled 22 percent to 7.38 million barrels per month as of November, according to the most recent data from the country’s central bank.

Growth

This year, the Finance Ministry estimates economic growth will slow to 5.35 percent with oil prices averaging $79.7 per barrel, according to the Finance Ministry’s 2012 budget.

The economy slowed in the third quarter to its weakest pace since the first three months of 2010, expanding 1.74 percent from 2.33 percent in the second quarter, the central bank said last month. Year-on-year growth in the quarter was little changed at 9 percent, the bank said.

Last year, Ecuador renewed a contract with PetroChina Co., China’s largest oil producer, for a $1 billion loan in exchange for future crude sales.

The Finance Ministry said June 27 that it signed an additional $2 billion loan with China Development Bank Corp. to finance public works projects and announced July 1 it will get a $571 million loan from the Export-Import Bank of China to build a hydroelectric plant in the southern Andes.

--Editors: Robert Jameson, Jonathan Roeder

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net David Papadopoulos at papadopoulos@bloomberg.net


Video Game Avenger
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus