Ecuador

Ecuador returns to external financing

Oscar Ugarteche

09/06/2014

Opinión

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Changes in the international economy are affecting Latin American economies that had imagined themselves beyond the usual balance of payments restrictions to growth. Perhaps the most visibly affected at the present time is Ecuador, which had confided her petroleum and balance of payments, to Venezuela and PDVSA with a refinery in Manta jointly established by both countries. This was announced in 2008 by both presidents. In 2014 we learn that the Refinería del Pacífico in Manta will be built with Chinese government funds as a joint venture with PetroChina. The reasons why Venezuela was unable to comply with their part of the deal may have to do with petroleum prices, which have not maintained the hoped-for trajectory due to the introduction of shale oil, amongst other reasons.

The retreat from environmental policies and the official abandonment of his ecologist base in order to exploit Yasuni, a condition imposed by the Chinese, appears to have been the price of maintaining a high and stable rhythm of growth in the future. The non-exploitation of Yasuni, because it was not worthwhile for the Chinese, is an ecological plus, but it has not restored the sympathy of the government’s ecological base, nor has it helped projections for growth.

On the other hand, the Ecuadorian gamble on the Banco del Sur was that they would be important actors in that institution. Now it is known that what emerged with new strength was the Corporación Andina de Fomento (CAF) that is already the country’s main source of external finance followed closely by China, after having distanced herself from the World Bank and the Inter-American Development Bank (IDB) and in more drastic terms from the international financial markets after announcing that the entire external debt with private creditors was illegitimate with the exception of some global bond issues. The country also distanced itself from Brazil’s BNDES due to a problem with a project and the case was taken to the international courts in Paris. These actions have left the government in the hands of those willing to lend to them, and under the conditions these would exact from them.

According to the Ecuador Times the Government will look for an additional 700 million dollars with bonds in foreign markets and one billion from the World Bank for hydroelectric projects. The international banking community has required a 100% guarantee in gold and 4.3% interest, which assumes a triple C perception of risk although in the tables published by credit rating agencies the risk is a stable B. Contrary to what might have seemed likely, the default on the debt in 2009 did not destroy the risk assessment of Ecuador in any important way and the country bounced back to its previous risk level due to her strong growth and the solvency of her macroeconomic management. However the return to the markets is costly.

The specific gold operation is what is called a gold swap, in which gold is given in exchange for money and then money is returned in exchange for gold at a fixed date and at a fixed price. That is, in the present year 2014, the only international financial operation to date and involved a gold collateral for a three-year credit. In these operations, the bank or the investor runs no risk because the physical guarantee is in their hands. The Ecuadorian Central Bank (BCE in Spanish) assessed the gold surrendered at 1,299 USD per ounce and the option to redeem it was at 1,281.9 USD per ounce, the price that Goldman Sachs has posted for an ounce of gold for June of 2017. If the operation succeeds, the BCE will gain to some extent, if the price falls and Ecuador buys its gold at a lower price in 2017. For example, if the price were to fall to 1,200, the BCE sold at 1,299 and will be able to redeem more gold at 99 dollars less. If the price rises, they will be able to exercise their buy option at 1,281,9 dollars per ounce and the Bank will have covered the part of the interest paid with the gain of 18.90 dollars per ounce–the difference between 1,299.00 and 1,281,9 USD/ounce.

The impression that comes out of Ecuador is that the international cost of their financial policies is appearing and that the new Chinese creditors are imposing the conditions of the game. To this must be added the conditions of the World Bank and then without doubt those of the IMF. It is unlikely that the country could make an international bond emission without guarantees, even though it will only be 350 million dollars in reality, without some backing and a high risk spread. This is the only explanation for the operation involving gold. While the contingency fund of the BRICS is not signed and their economic observatory not established to follow and back up emerging economies, it is improbable that there will be another actor other than the International Monetary Fund to provide these policies guarantees. If the Latin American Reserve Fund (FLAR) had more power and were a real expression of South American power, it could become the guarantor for these emissions. But it is not and the reform of the financial architecture of South America [O1] has been blocked for the umpteenth time from the beginnings of the Twenty-First century. The international economic policy of Ecuador appears to have taken a major shift from its point of departure and the country appears to be following a different path than that previously foreseen.

(Translated for ALAI by Jordan Bishop)

- Oscar Ugarteche, a Peruvian economist, is the Coordinator of the Economic Observatory of Latin America (OBELA), and the Institute of Economic Research of UNAM, Mexico – www.obela.org. He is a member of the SNI/Conacyt and president of ALAI www.alainet.org.

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