Ecuador Will Probably Tap China, Pensions to Finance Deficit, Fitch Says

Ecuador will probably tap the nation’s pension fund and seek a loan from China next year to help finance its estimated $2.7 billion budget deficit, according to Erich Arispe, an analyst at Fitch Ratings.

South America’s seventh-biggest economy may need as much as 4.3 percent of gross domestic product to fund the “relatively large” deficit, Arispe, a New York-based analyst at Fitch, said yesterday in a telephone interview.

Ecuador is using debt to increase spending on infrastructure projects and social programs in a bid to lower unemployment and boost economic growth, President Rafael Correa said in a June 5 statement. The nation’s default on $3.2 billion in bonds since 2008, declining oil production and a slump in private investment has crimped funding sources, Arispe said.

Correa “has to find a way to finance his ambitious investment projects,” Arispe said. “Given the limited potential of increased oil-derived revenue” and declining investment, “increasing debt is the option they have at this point.”

Ecuador’s Finance Ministry didn’t respond to an e-mail or telephone message after normal working hours yesterday. Finance Minister Patricio Rivera last week declined to answer reporters’ questions about next year’s budget.

Default Risk

The nation also will probably seek loans from Corporacion Andina de Fomento, a Caracas-based multilateral lender, and the Inter-American Development Bank, the biggest infrastructure lender in Latin America, Arispe said.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries narrowed 6 basis points, or 0.06 percentage point, to 10.36 percent at 9:09 a.m. New York time, according to JPMorgan Chase & Co.’s EMBI+ index. Ecuador’s spread has widened 23 basis points in the third quarter, compared with a 58 basis-point drop for the index.

Ecuadorean sovereign debt is the second-riskiest after Venezuela’s among 15 emerging markets tracked by JPMorgan, according to the bank’s EMBI+ indexes.

The government next year will also begin offering treasury notes with a term of less than one year to boost liquidity, Rivera said Sept. 24. Ecuador has proposed legal changes to allow the country’s banks to use short-term government bonds for as much as 75 percent of their reserves and let the government boost public debt to 50 percent of GDP from the current limit of 40 percent, Rivera said.

Economic Growth

The Finance Ministry said yesterday China delivered $800 million of a $1 billion loan agreement signed last month and will deliver the remaining $200 million in the “next months.” Ecuador owed China $3.66 billion as of July 31, according to a Finance Ministry report. The figure doesn’t include the $1 billion loan signed in August.

Ecuador’s GDP will probably rise as much as 3.5 percent in 2011, up from an estimated 3 percent this year, while inflation increases to 5.1 percent from Fitch’s forecast of 3.9 percent, Arispe said.

Ecuador’s economy expanded 0.33 percent in the first quarter from the previous three-month period and 0.6 percent from the same period a year earlier as growth in non-oil industries helped compensate for the steepest decline in crude revenue since 2007, the central bank said June 30.

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

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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