Ecuador’s inability to borrow in international markets after its 2008 default is drawing the nation closer to China as the world’s largest commodities consumer grants loans in exchange for access to oil and metals.
Home to untapped copper reserves similar to those of Chile and Peru, the world’s top producers, Ecuador has signed loans for $7.3 billion from China since 2009, or about one-third of the Andean country’s annual budget, according to data compiled by Bloomberg based on government announcements. President Rafael Correa is asking China for an additional $1.7 billion to prop up public spending before February’s elections, following a trail blazed by his ally, Venezuelan President Hugo Chavez.
China is granting loans to Ecuador, which holds South America’s third-largest oil reserves, in exchange for the raw materials it needs to fuel economic growth. The money enabled Correa, 49, to boost forecast public spending by 9 percent this year.
“They’ve gained access to another source of external financing,” Sarah Glendon, a New York-based analyst at Moody’s Investors Service, said by phone on Sept. 14. “The fact that they were able to find that in China has definitely been positive.”
In programs similar to those implemented by Chavez, Correa has used the Chinese loans to rebuild the nation’s crumbling energy infrastructure and expand its highway system.
The former economics professor, who presided over Ecuador’s $3.2 billion default in 2008 and 2009, has also granted Chinese state-run companies government contracts as well as mining and oil concessions.
In March, Ecuador signed its first-ever large-scale mining contract with a copper unit of state-owned China Railway Construction Corp. (601186) and Tongling Nonferrous Metals Group Holdings Co. (000630), China’s second-biggest copper producer. Five months later, China Petroleum & Chemical Corp. (600028) agreed to buy part of Repsol SA’s oil operations in Ecuador, a member of Organization of Petroleum Exporting Countries.
Finance Minister Patricio Rivera didn’t respond to phone and e-mailed messages sent to his press office seeking comment.
Chinese funding has also helped lift Ecuador’s credit rating, according to Moody’s. On Sept. 13, the New York-based company raised Ecuador’s sovereign credit rating one step to Caa1, seven levels below investment grade, citing economic growth that’s averaged 4.2 percent over the last five years.
The yield on benchmark Ecuadorean dollar bonds due in 2015 has dropped 90 basis points this year to 8.38 percent, according to data compiled by Bloomberg. That compares with a 388 basis- point drop in similar maturity dollar bonds issued by Venezuela.
While the China loans come with strings attached, the nation has few other options, says Vicente Albornoz, dean of the business school at the Universidad de las Americas in Quito.
“No one else is lending to Ecuador except China,” Albornoz said. “If we went to the international markets the rates would be even higher.”