Crude’s slump to five-year lows means OPEC member Ecuador is facing the choice of spending cuts that risk crimping growth or taking on more debt to finance outlays, Jefferies LLC said.
President Rafael Correa, who predicts that oil prices will rebound by mid-2015, has warned the country that budget cuts could lie ahead. “There will be choices to be made,” he said. “Maybe we’ll only be able to build 100 new schools instead of 200, but we will continue to move forward,” he said during a recent television broadcast.
Ecuador, which defaulted on $3.2 billion of its foreign debt in 2008 after crude tumbled 58 percent, will lose an additional $2.5 billion in oil revenue next year if prices remain at current levels and may need to double the amount of cash it seeks from capital markets to $4 billion, according to Siobhan Morden, head of Latin America strategy at Jefferies.
With crude prices down more than 20 percent since the government sent the National Assembly its 2015 budget on Nov. 1, President Rafael Correa has said he plans to cut funds for new schools and police stations before sacrificing spending on oilfields needed to generate revenue. Correa, who has criticized former presidents for cutting social spending and taking on too much debt during economic downturns, will also seek new loans from China to help prop up the budget, according to the Finance Ministry.
“We have a number of options to weather the drop in prices,” Correa says, “and we intend to use them.”
The drop in crude prices “implies billions in either cutbacks or new financing, which poses a difficult adjustment for the small size of the Ecuador economy,” Morden said in an e-mailed note to clients. “The alternative to pro-fiscal tightening is the politically more palatable option of sourcing funding with plans for an official trip to China.”
The nation’s benchmark dollar bonds due in 2024 fell to a record low today, with yields jumping 0.19 percentage point to 8.88 percent at 12:25 p.m. in New York, data compiled by Bloomberg show.
The press office of Ecuador’s Finance Ministry didn’t immediately respond to an e-mailed message seeking comment on funding plans. Ecuador is the smallest-producing member of the Organization of Petroleum Exporting Countries.
Credit: Bloomberg News, www.bloomberg.co