Ecuador Taps China for $2 Billion in Deal Backed by Oil Sales

Ecuador, the serial defaulter that used half its gold reserves this year as collateral for a loan from Goldman Sachs Group Inc., pledged $2 billion of future oil production to China for additional financing.

The OPEC-member country disclosed the China deal in an offering circular to bond investors last month. Under the May agreement, Unipec Asia Co., a unit of China Petroleum and Chemical Corp., known as Sinopec, prepaid for oil from PetroEcuador over an unspecified timeframe.

Ecuador has more than tripled public spending since President Rafael Correa took office in 2007, and the country plugged budget deficits by borrowing more than $11 billion from China in the past five years after a 2008 default hobbled its ability to borrow in international credit markets. In addition to the $400 million loan from Goldman Sachs, Ecuador tapped international bond markets last month for $2 billion.

“The president’s economic program since the beginning has been based on a very aggressive investment plan paid for by oil funds, and it needed to be supplemented with external credit,” Walter Spurrier, director of the economic research company Grupo Spurrier, said yesterday in a telephone interview from Guayaquil.

Correa had said the government was seeking additional financing from the Asian country, the world’s biggest oil consumer after the U.S. Ecuador is the smallest member of the Organization of Petroleum Exporting Countries by production after Libya, with 553,000 barrels a day of output in June, based on Bloomberg estimates.

‘Onerous’ Terms

Home to South America’s third-largest oil reserves and untapped copper reserves similar to those of Chile and Peru, the world’s top producers, Ecuador has granted Chinese companies access to copper mines and oil fields since the default.

The government faces a record budget deficit this year of $4.5 billion, Finance Minister Fausto Herrera told reporters in Quito on June 24.

“We always said this would be a hard year,” Herrera said.

Neither the Finance Ministry nor PetroEcuador responded to requests for comment on the China deal.

In May, Ecuador obtained the loan from New York-based Goldman Sachs by using about half of its gold reserves as collateral, according to Correa.

The Andean country’s bond sale last month, its first offering in international debt markets since the default, helped the country diversify financing sources away from the “onerous” terms demanded by China, Standard & Poor’s analyst Richard Francis said in a June 23 interview.

The yield on Ecuador’s benchmark dollar bonds due in 2024 rose one basis point, or 0.01 percentage point, to 7.72 percent yesterday, according to data compiled by Bloomberg. The extra yield investors demand to own Ecuadorean bonds instead of U.S. Treasuries fell 0.01 percentage point to 4.03 percentage points, according to JPMorgan Chase & Co.’s EMBIG index.

Before it's here, it's on the Bloomberg Terminal.