LatinFinance - March/April 2015 - Supplement - 5

Government Financing

Broader horizon
Ecuador has diversified its sources of funding in recent years. With the dramatic drop in
oil prices, those new links will be put to the test
In the most visible element of a strategy
to tap a growing range of funding
sources, Ecuador staged a return to the
international bond market last year.
The country borrowed $2 billion in
a transaction that many had thought
impossible. Investors placed some $5
billion in orders, allowing the country to
increase the size of the deal from the $1
billion originally planned. The bond was
priced to yield 7.95%.
The deal underscored the country's
changed relationship with international
capital. Ecuador had been ostracized
by global investors after declaring two
cross-border bonds illegal in 2008.
Since then, it bought back those
bonds and gradually turned to a wider
array of investors.
Chinese investment has heavily
funded infrastructure and social projects
that have been fueling strong growth.
Most recently, Ecuador secured up to
$7.5 billion in ﬁnancing from China
in January. Most of the funds are part
of a 30-year loan on which Ecuador
pays just 2%. That credit is intended
to promote Chinese exports and
ﬁnance Chinese companies working on
infrastructure projects. The average cost
for the rest of the ﬁnancing package
was 7%, President Rafael Correa told
LatinFinance.
Ecuador has also turned to other
sources of bilateral funding, including
Brazil, Qatar and other Arab countries
for strategic projects.
Multilateral lenders are also stepping
up: the World Bank, which is already
supporting a mass transit and water
project, is willing to increase its proﬁle
in the country. The Inter-American
Development Bank (IDB) agreed a $300
million stand-by credit line for Ecuador

in December to help mitigate negative
effects of the oil shock, and in February
a $500 million loan to reform the
country's energy matrix.
Ecuador's relationship with the IDB is
a "very good" one, Correa says, adding
that loans from the bank no longer
come with conditions of structural
reforms as they once did.
Fiscal action
Now, with the fall in oil prices,
the strength of Ecuador's recentlybroadened funding sources will be put
to the test.
Last year's bond sale was a vote of
conﬁdence on President Rafael Correa's
macroeconomic policies and Ecuador's
good growth record - but also a bet
on oil.
Ecuador is the smallest member of
the Organization of Petroleum Exporting
Countries. Crude exports represent
around 50% of Ecuador's total export
revenues, while the government relies
on oil to ﬁnance 8.6% of its budget.
Ecuador has moved quickly to
mitigate the impacts of low oil prices,
cutting $1.4 billion from the 2015
budget at the same time as it mustered
new bilateral and multilateral ﬁnancing,
says Finance Minister Fausto Herrera.
"With these credit lines, the ones

"OUR FISCAL ACCOUNTS CAN EASILY
WITHSTAND OIL PRICES
AT BELOW $40 PER
BARREL THIS YEAR"
Fausto Herrera

that come from China, and those that
will come from multilateral lenders,
as well as the budget cuts ... we have
secured enough ﬁnancing for the 2015
budget and now our ﬁscal accounts
can easily withstand oil prices at below
$40 per barrel this year," Herrera tells
LatinFinance.
Moody's described Ecuador's moves as
credit positive, while Fitch said the credit
lines from China eased concerns about
possible ﬁnancing constraints from lower
oil-derived revenue and potentially tighter
external funding conditions in 2015.
Still, Ecuador had planned to spend
more on large infrastructure projects this
year than previously. It is also looking
for international support for a new oil
reﬁnery on the Paciﬁc coast it wants to
start building this year.
The facility would end Ecuador's
requirement to import oil derivatives,
and increase the value of its exports.
"This is a project that is desperately
needed," says President Correa.
"Ecuador has been exporting oil for
40 years - and we still have to import
derivatives for internal demand. We
can't even reﬁne the oil that we need for
our own consumption."
Nonetheless, the construction cost is
high: a little more than $7 billion.
Venezuela and China had been
expected to help fund the project, but
the fall in oil prices is also hampering
advances there, says Correa. While much
of the preliminary work has been done
to build the reﬁnery, construction of
the plant itself may be delayed by some
months because of the international
ﬁnancing needed.
Lower oil revenues and lower growth
this year will likely put Ecuador in a more
difﬁcult situation in 2016, says Santiago

March/April 2015 - A Supplement to LatinFinance 5
LatinFinance - March/April 2015 - Supplement

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