Ecuador Receives $1.2 Billion Loan From China for Budget

Ecuador borrowed $1.2 billion from China, its second loan from the country this year to help fund its 2013 budget, according to a Finance Ministry official.

China transferred the money to the Andean country on Aug. 12 as part of a “commercial operation” with Ecuador’s state-owned oil company, PetroEcuador, the official, who asked not to be identified because he isn’t authorized to comment publicly, said today in a telephone interview from Quito. He declined to give more details about the loan.

President Rafael Correa, a 50-year-old former economics professor who’s relied on Chinese lending to prop up public spending since taking power in 2007, plans to increase government outlays by 7.8 percent this year even as the Finance Ministry forecasts economic growth will slow to a three-year low of 4 percent. The government, which defaulted on $3.2 billion of foreign debt four years ago, received a separate $1.4 billion loan from China in February to help fund spending.

China’s embassy in Quito didn’t immediately respond to a telephone message seeking comment.

Ecuadorean Finance Minister Fausto Herrera said July 8 the government expected another loan from China this year. The new loan is part of this credit, the official said.

Ecuador, which holds South America’s third-largest oil reserves, has strengthened ties with China since losing access to global credit markets after the defaults in 2008 and 2009.

Chinese Loans

The world’s largest commodities consumer has given Ecuador more than $9 billion since Correa took power, according to data compiled by Bloomberg, while its state-owned companies have won access to the OPEC-member nation’s oil and metal deposits.

Ecuador borrowed $1 billion from state-owned PetroChina Co. in 2011 to be paid back with future crude shipments. In February, the government received a $1.4 billion, eight-year loan from China with an average interest rate of 7 percent, according to the ministry.

The government is also planning its first international bond sale since the default to fund public works projects. The sale is planned by the first quarter of 2014 and will “depend on conditions,” Herrera said in July.

Ecuador’s 2013 budget called for spending that was $5.05 billion more than projected revenue, a figure equal to about 16 percent of planned outlays, according to Finance Ministry data.

The yield on the government’s $650 million of dollar-denominated bonds due in 2015 fell 5 basis points, or 0.05 percentage point, to 7.86 percent today as of 3:13 p.m. in New York, according to data compiled by Bloomberg.

The extra yield investors demand to own Ecuadorean bonds instead of U.S. Treasuries was unchanged today at 6.50 percentage points, according to JPMorgan Chase & Co’s EMBIG index. The extra yield, or spread, has narrowed 1.76 percentage point this year, compared with a 0.98 percentage point increase for the index, according to JPMorgan.

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