More Loans for Ecuador

This article from Bloomberg details several recent loans Ecuador has received from various sources – most prominently China and some major investment firms.

Ecuador got $924 million in previously undisclosed loans from Deutsche Bank AG and other lenders, showing the extent of President Rafael Correa’s effort to line up a record amount of financing as oil prices plunge. 

The country took $181 million in two separate loans from units of Deutsche Bank and obtained $125 million from the European Investment Bank, according to a prospectus prepared before the government sold bonds this month that was reviewed by Bloomberg News. Ecuador also got financing from Bank of China Ltd. and a Chinese state oil company, the document shows. 

The 50 percent drop in oil prices over the past 12 months has pushed the Andean nation’s financing needs to a record $10.5 billion this year, prompting Correa to court banks, international debt investors and foreign governments to make ends meet. Last week the country sold $750 million of bonds with a 10.5 percent interest rate, the highest for any major dollar-bond sale this year. [...] 

Included in the newly disclosed financing was a $218 million credit facility agreement with the Bank of China in November. The Deutsche Bank loans were in November and February. The European Investment Bank loan came in December. 

The government also said it received $2.4 billion in loans from Unipec Asia Co., a unit of China Petroleum & Chemical Corp., in May 2014. Last year, Ecuador had put the size of the loans at $2 billion.

There's nothing wrong with getting loans of course. Governments do it all the time (as do we individuals). The concern in this case is that these loans are being sought to cover fiscal deficits the country is facing as a result of social programs which President Correa has expanded greatly, and which are unsustainable without the income Ecuador was receiving from Amazonian oil.

The extra loans still aren’t enough to offset the decline in oil prices and a slowdown in Chinese lending, Edward Glossop, an emerging-market economist at Capital Economics in London, said in a telephone interview. The government will need more money in the second half of the year if it wants to maintain current spending levels, he said. 

A promised $1.5 billion loan from China that was expected to be disbursed in February has already been delayed twice and is now expected to be disbursed in April, Herrera said March 23. The loan amount has risen and is now expected to be $2 billion, he said. 

“These kind of piecemeal arrangements of financing from here and there are only going to take them so far,” Glossop said. “It’s not going to change the fact that they can’t sustain this level of spending.

If oil prices remain low for long, then the government will be faced with some very hard choices: either the social programs will need to be cut back (which will cause some political unrest, and cut into Correa's high popularity ratings), or the government will have to go deep into debt (possibly causing the sort of problems Venezuela is currently facing).

Of course, the parallel is far from exact – Venezuela has been on its current path longer than Ecuador has, and its problems have been visible for quite a while. Venezuela is also far more dependent on oil than Ecuador is, and thus has been hit harder by recent price drops. Most important, perhaps, is that Venezuela has its own currency, the value of which the government can manipulate. Ecuador uses the US dollar.

As the temptation to manipulate currency rises, the temptation to have a currency the government can play with to provide short-term relief from fiscal problems may become too great to resist. At that point, Correa may decide to de-dollarize Ecuador (he was opposed to the original dollarization decision, made prior to his presidency), or try to use Ecuador's new e-currency to fill any budget gaps.

Note that the above several paragraphs of speculation began with a big 'if': “If oil prices remain low for long ...”