China has replaced the IMF and U.S. as Ecuador´s largest creditor; some worry about the extent of the debt
Ecuador sees the loans it has agreed to 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]," left-wing 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% of our crude oil to China", as payment for the loans. But "in the past, more than 75% [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 $2 billion, divided into two tranches, is to be repaid over eight years at an average weighted interest rate of 6.9%.
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 Maria de la Paz Vela, the sums borrowed come to over $7.2 billion, equivalent to 11.7% of gross domestic product (GDP).
The latest credit "covers the country's annual investment program for 2011", said 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 last week thanks to a decision by the US Congress to raise the country's debt ceiling.
"The United States debt represents more than 95% of its GDP, while Ecuador's is only 23% of GDP," Correa said.
Correa said that the July 28 summit of the Union of South American Nations (UNASUR) in Lima, Peru 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 Inter Press Service (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 favorable" than for other countries, and the Chinese government wanted the details kept under wraps.
Rivera confirmed that $3 billion in debt will fall due on the loans from China in 2011-2012.
The Ecuadorian economy is forecast to grow at over 6% this year and 4.2% in 2012, said Correa, a left-leaning US-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 2% next year. "I will check the figures, but I can't believe that oil production is shrinking," he said.
Afterwards, 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 Organization 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 a barrel, with global demand growing by around 3%.
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, 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 endeavors, which will involved over $3.5 billion 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 8%, while the mining companies refuse to pay more than 6%.
"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 Rodrํguez, a lawyer and political analyst, told IPS.
He was referring to the precariously slim margin of victory for governing party lawmakers Sunday on August 1, when Fernando Cordero was re-elected as president of congress.
Correa said: "They can accuse me of being an autocrat if they like, but as president I must fulfill 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 authorizing the president to dissolve parliament and call fresh general elections.
Credit: By Gonzalo Ortiz, Inter Press Service for http://www.atimes.com; photo caption: President Rafael Correa