ECUADOR IN US$1 BN DEAL WITH CHINA / THE FINANCIAL TIMES

Ecuador in $1bn oil deal with China

By Naomi Mapstone in Lima

Published: August 17 2009 21:02

Ecuador has reached out to China to ease its liquidity crisis, signing a deal to supply the energy-hungry nation with 69m barrels of oil over the next two years in return for a $1bn advance payment.

China is also offering a $1bn loan, according to comments by Fander Falconi, foreign minister, reported in Ecuadorean Hoy, a local newspaper.

China has sought to secure long-term access to oil from Ecuador at a time when the Andean nation is running perilously low on liquidity following the commodities crash and its controversial default on $3.2bn in foreign debt that it argued was “illegitimate”.

The leftist administration says it has paid $900m to repurchase about 91 per cent of the Global 2012 and 2030 bond issues, a deal that weakened its already strained relations with foreign investors and multilaterals.

The Andean Development Organisation (CAF) and the Latin America Reserve Fund (FLAR) have lent close to $1bn between them to Ecuador in recent months, and the country is expecting a $500m loan from the Inter-American Development Bank. But Rafael Correa, president, refuses funds from the International Monetary Fund.

Some critics of the deal with China say the 7.25 per cent interest rate is too high, amounting to about $145m, and will still leave Ecuador struggling to reinvigorate its economy as long as oil prices remain at modest levels.

“Under these circumstances, the government’s revenue stream and access to credit are clearly insufficient to drive the economy into high gear,” Ramiro Crespo, head of Analytica Securities, said in a research note. “Yet they are likely enough to keep the state from de-dollarising and the economy from collapsing.”

The international financial crisis and commodity slump has hit the Andean nation hard, with oil dipping below $30 a barrel, a dramatic drop in remittances from Ecuadoreans living in Spain and the US, and legislative changes leading to higher domestic labour costs.

Copyright The Financial Times Limited 2009