Big Bucks from China Drive Domestic Development in Ecuador

(IPS) – Ecuador sees the loans it has agreed with China as “good news,” because they are long-term, and all that is required in return is “oil, and not the horrendous adjustments imposed by the IMF (International Monetary Fund),” leftwing Ecuadorian President Rafael Correa told analysts critical of the size and high interest rates of the loans.

At his first press conference with foreign correspondents in 10 months, Correa said some people “are raising Cain because we have promised to sell 52 percent of our crude oil to China,” as payment for the loans. But “in the past, more than 75 percent (of Ecuador’s oil) went to the United States, with nothing to show for it, and nobody complained,” he said.

Correa said the latest Chinese loan for two billion dollars, divided into two tranches, is to be repaid over eight years at an average weighted interest rate of 6.9 percent.

The total amount China has lent to Ecuador has not been officially disclosed, and analysts’ calculations based on partial data do not tally. According to economist María de la Paz Vela, the sums borrowed come to over 7.2 billion dollars, equivalent to 11.7 percent of GDP.

The latest credit “covers the country’s annual investment programme for 2011,” said the finance minister, Patricio Rivera.

“We won’t be losing any more sleep over how the international markets will treat us,” replied Correa when asked if Ecuador would launch another bond issue, and he added that this Andean country will not be approaching the IMF for credit.

“We will try to re-enter the markets, but if that is not possible, we will carry on as we are,” he said, a possible indication that there may be a pilot plan to issue sovereign debt, but with no rush to do so.

“The big risk now is bonds from the United States, not from Ecuador,” Correa joked, referring to the financial crisis originated in the United States in 2008 which brought that country to the brink of default, headed off at the last minute this week thanks to a decision by the U.S. Congress to raise the country’s debt ceiling.

“The United States debt represents more than 95 percent of its GDP, while Ecuador’s is only 23 percent of GDP,” Correa said.

Correa said that the Jul. 28 summit of the Union of South American Nations (UNASUR) in Lima decided to study “conjunctural and structural measures” to deal with the fall-out from the crisis in Europe and the United States, which he regards as structural in nature.

Asked by IPS about the secrecy that since 2009 has surrounded the credit arrangements with China, Rivera said that China had requested confidentiality because “the conditions granted to Ecuador are more favourable” than for other countries, and the Chinese government wanted the details kept under wraps.

Rivera confirmed that three billion dollars in debt will fall due on the loans from China in 2011-2012.

The Ecuadorian economy is forecast to grow at over six percent this year and 4.2 percent in 2012, said Correa, a left-leaning U.S.-educated economist, who attended the news briefing straight from a working session with his team of economic advisers that lasted several hours.

At his meeting with the press, Correa seemed taken by surprise when he was told that oil output is expected to fall by two percent next year. “I will check the figures, but I can’t believe that oil production is shrinking,” he said.

Afterwards Minister Rivera told IPS privately that the forecast was based on the planned temporary closure of the Esmeraldas refinery, the largest in the country, to last up to six months. This closure has now been rescheduled for late 2012 or early 2013. “We are planning the government’s cash flow because the closure of the refinery means we will have to import refined fuels,” Rivera said. After 40 years of operation, the Esmeraldas plant is due for a complete overhaul, experts say.

The Organisation of Petroleum Exporting Countries (OPEC), to which Ecuador belongs, predicts that oil prices in 2012 will be much the same as this year, between 90 and 100 dollars a barrel, with global demand growing by around three percent.

Meanwhile the mid-year report of the Economic Commission for Latin America and the Caribbean (ECLAC) predicts that Ecuador’s economy will continue to be one of the fastest-growing countries in Latin America this year. As in other countries in the region, the driving force of its growth is internal demand.

Domestic consumption in Ecuador is driven by public spending, which in turn is kept high by oil revenues and credit from China, some granted for “free disposal” and others earmarked for infrastructure works.

The largest such loan, amounting to 1.67 billion dollars, is for the Coca-Codo Sinclair hydroelectric project, already under construction by China’s Sinohydro Corporation, in the transition zone between the Andes highlands and the Amazon jungle.

In the next few years, Ecuador is also hoping for windfall revenue from large-scale gold, silver and copper mining endeavours, which will involved over 3.5 billion dollars in investment.

But Correa admitted that negotiations with the mining companies, under the new legal framework, are proving “extremely difficult.”

One of the main sticking points is the question of royalties. Correa said the government is demanding eight percent, while the mining companies refuse to pay more than six percent.

“Revenues will be huge, because the royalties will be levied on income, not profits,” the president said. Sources consulted by IPS said another key problem is the issue of dispute settlement. The government wants potential disputes to be worked out in Ecuador, while the mining firms are demanding international jurisdiction.

“Governance is essential to the working of the economy, which is far from being consolidated,” Antonio Rodríguez, a lawyer and political analyst, told IPS. He was referring to the precariously slim margin of victory for governing party lawmakers Sunday Aug. 1, when Fernando Cordero was reelected as president of Congress.

Correa said: “They can accuse me of being an autocrat if they like, but as president I must fulfil the mission of bringing change to this country.”

He went on to say that if opposition lawmakers secure a majority in Congress and obstruct government policies, “not 10 minutes will pass” before he invokes “muerte cruzada”, a constitutional provision authorising the president to dissolve parliament and call fresh general elections.