Ecuador Seeks Liquidity Loan as Correa Loses Oil Funding

Ecuador is seeking a $515 million loan from the Latin American Reserve Fund to shore up liquidity as falling oil prices leave President Rafael Correa looking for new ways to fund spending.

FLAR, as the Bogota-based stability fund is known, approved the loan equal to 13 percent of Ecuador’s international reserves to allow the government to finance its balance of payments, the Finance Ministry said in a statement yesterday. The three-year loan carries an interest rate between 3.6 percentage points and 4 percentage points over the three-month Libor rate. The ministry didn’t say when the funds would be disbursed.

Ecuador, a member of the Organization of Petroleum Exporting Countries, is trying to avoid a liquidity crisis like the one that led to a banking crisis in the 1990s and adoption of the U.S. dollar as its official currency in 2000. Correa, an ally of Venezuelan President Hugo Chavez, defaulted on $3.2 billion of global bonds in 2008 and 2009 that he considered part of an “illegitimate” and “illegal” foreign debt.

“It is disturbing that having such important quantities of funds like those received from oil, that we have to seek external loans,” Luis Luna, an economist and former Ecuadorean sub-secretary of trade, said last night in a telephone interview from Quito. “There’s an excess of public spending.”

The $515 million loan is the biggest of three that Ecuador has sought since 2005 from the FLAR, which was created to help regional governments overcome balance-of-payment problems. Only Bolivia and Costa Rica, both of which lack Ecuador’s oil wealth, have sought aid from the organization in the past decade.

Oil Dependence

Ecuadorean Finance Minister Patricio Rivera, Correa’s fifth since taking office in 2007, didn’t immediately respond today to a telephone messages seeking comment.

Ecuador, dependent on oil exports for about 41 percent of government revenue, forecast government spending will jump 9 percent this year to $26.1 billion, or about a 36 percent of gross domestic product, according to the nation’s 2012 budget.

To fund a fiscal deficit that the government estimates will reach $4.23 billion this year, or 5.9 percent of GDP, the government may seek help from China as it has done previously, London-based Capital Economics Ltd. wrote in a report this week.

Ecuador’s dollarized economy, and the lack of savings during years of stronger economic growth, leave it with “little or no legroom in an environment of falling oil prices,” Capital Economics said.

Slowing Down

First-quarter economic growth in Ecuador was the slowest in two years, with GDP rising 0.7 percent from the previous three months. Correa in February said his government was negotiating a $1.7 billion loan with China, which has loaned the South American country about $7.3 billion since 2009.

The Andean country’s central bank today lowered its GDP forecast for 2012 to 4.8 percent from the 5.35 percent estimate used in this year budget approved in November.

Ecuador’s Oriente crude tumbled 21 percent to $88.62 per barrel in the three months through June, according to data compiled by Bloomberg. Benchmark West Texas Intermediate oil traded in New York dropped 19 percent. Today, Oriente slid 3.2 percent to $86.95 as of 1:27 p.m. Quito time, while WTI fell 3 percent to $84.60 per barrel.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries today widened 2 basis points, or 0.02 percentage point, today to 872, bringing this year’s increase to 26 basis points, according to JPMorgan Chase & Co.’s EMBIG indexes. That compares with a 56 basis-point decline for the EMBIG, making Ecuador the third-riskiest economy in South America after Venezuela and Argentina, JPMorgan data show.

Correa, speaking June 30 in his weekly address to the nation, said Ecuador’s economy is doing “quite well” and that the government is prepared for any possible slowdown. He said oil prices would have to fall below $53 per barrel to affect budgeted spending in 2012.

Recent Upgrade

Standard & Poor’s upgraded the country’s credit rating last month for the third time since its default, to B from B-, citing the government’s willingness and capacity to service its debt amid higher oil production and economic growth prospects.

The Treasury has saved $600 million from higher-than-budgeted oil prices this year, Correa said. That would cover about one-third of the country’s average monthly imports, according to central bank data.

Ecuador’s Treasury deposits at the central bank fell 16 percent last week to $1.9 billion, the bank said July 2 in a report on its website. The country’s total international reserves, the smallest among South America’s major economies, fell 4 percent to $3.93 billion, the report said.

FLAR’s seven members are Bolivia, Colombia, Costa Rica, Ecuador, Peru, Uruguay and Venezuela.

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