13 January 2015

China Rescues Ecuador Budget From Deeper Cuts as Crude Drops

By Nathan Gill
(Bloomberg) -- Ecuador, an OPEC nation that relies on crude for about a quarter of revenue, obtained enough financing from China to avoid deeper budget cuts even as its oil price fell below $40 a barrel, Finance Minister Fausto Herrera said.

The Latin American country expects total financing needs for 2015 to rise to about $10.5 billion from a previous estimate of $8.81 billion, Herrera said today in an interview at his office in Quito. The government will use loans from China, multilateral lenders and the nation’s social security agency to help offset a drop in the price of crude, the nation’s biggest export, he said. The ministry isn’t planning to sell international bonds this year after global interest rates rose, he said.

Ecuador’s government announced last week that it would cut $1.42 billion of public spending on items such as new schools and police stations while going deeper into debt with the Asian nation. On top of the $7.5 billion in Chinese loans and credit lines announced last week, the government expects to sign loan deals with China for an additional $1.5 billion later this month and is in talks with the country to borrow another $1.5 billion in May or June, Herrera said.

“The public finances for 2015 are totally closed,” Herrera said. “With the budget cut and investment that we’ve received, we can balance public finances with an oil price much lower than $40 a barrel.”

Borrowing Costs

Ecuador, the smallest member of the Organization of Petroleum Exporting Countries, has seen its Oriente crude drop 42 percent to $39.38 a barrel since the nation’s congress approved the 2015 budget on Nov. 20.

The Andean country now estimates prices for its oil will average $50 to $60 a barrel this year, down from a previous forecast of $79.70, Herrera said.

As oil prices have fallen, the nation’s borrowing costs climbed, pushing up yields on Ecuador’s benchmark dollar bonds due in 2024 to 11.2 percent, according to data compiled by Bloomberg. Those rates are probably too high for a new issuance, Herrera said.

“With these interest rates, we believe that it is very difficult for Ecuador to enter into capital markets today,” Herrera said. “We can finish the year perfectly with the financing we have already signed with China, multilaterals as well as the social security agency.”

New Loans

The new loans from China are expected to carry an interest rate of between 6 percent and 7 percent, Herrera said. The government is also in talks with Chinese banks to help finance an oil project in the Yasuni National Park, the minister said. If that doesn’t work out, the Finance Ministry or the country’s state-owned oil producer Petroamazonas could sell global bonds to finance the project.

Ecuador will also use about $800 million in loans from the Inter-American Development Bank this year, the minister said. The government had previously announced it would receive $300 million from the regional lender tied to infrastructure projects. Herrera said today the country would receive an additional $500 million in discretionary lending from the agency, known as the IDB.

The government also plans to retire its $650 million of bonds due in December and will meet all of its financial obligations, Herrera said.

Separately, Herrera said a $5.3 billion concessional credit from China, announced last week, will be used to pay for goods and services from Chinese companies. Ecuador expects to receive between $600 million and $700 million of that credit this year, he said. A deal announced last week to allow China’s Powerchina Xibei Engineering Corp. to explore for new metal deposits in Ecuador is tied to the credit line and will cost the government about $220 million, Herrera said.

“China has certain interests and gives certain preferences to certain projects in Ecuador,” Herrera said. “We plan for this to be the last year with high deficits.”