China is the country’s main creditor. According to the Ministry of Finance, Ecuador’s commitments with banks and the Chinese Government amounted to USD 7 159 million up to July, which represents 20.7% of public external debt.
The Government recognizes that several tranches of this debt are burdensome for the country; therefore, one of the strategies proposed by President Lenin Moreno in his Prosperity Plan is “the improvement in financing conditions with the Asian giant”.
In December, a delegation headed by President Moreno is expected, and Finance Minister Richard Martinez will travel to this country. “China is a source of important financing, it is important to achieve that level of debt and the profile of debt we have with this country, have other characteristics in the future,” Martinez said on September 13, at a conference organized by the Asobanca .
The holder of this State Portfolio has not given details about the trip’s agenda. However, Juan Sebastián Roldán, secretary of the Presidency, told Radio Democracia on August 30 that “the Minister of Finance will travel to China” and assured that “you already have a work plan” to seek better conditions with that country.
Jaime Carrera, secretary of the Fiscal Policy Observatory, explains that there are two alternatives that the delegation can put into practice during the trip. The first is to negotiate lower interest rates and longer terms with Chinese creditors. According to Finance data, between 2010 and 2017 there were 23 credit transactions with Chinese entities.
Of these, 12 were contracted for terms of less than 10 years and interest rates between 6 and 7.25%.
According to Carrera, although there is external debt in bonds with rates above 7%, it is a question of longer-term debt.
In addition, he says, “much of the debt with China was tied to oil or the contracting of works with companies in that country, which resulted in overpricing and failures.” With this, the debt “ends up being more expensive than the rate reflects,” he says.
In 2016, for example, the country contracted US $ 2 billion with the Development Bank of China, of which US $ 1.5 billion was tied to an oil purchase contract and US $ 500 million to the execution of specific projects investment with Chinese companies.
Multilaterals such as the Inter-American Development Bank (IDB), for example, that grant loans for specific investment projects, do so with rates of 2% and more than 20 years. For Carlos de la Torre, former finance minister, renegotiate conditions of a debt contract is not appropriate, because it would affect the country’s image in the international market, as it means telling creditors that Ecuador cannot pay under the agreed conditions.
The second option, according to Carrera, is to look for a “novation of credits”, which consists of accessing new loans with Chinese banks, but with better conditions. With these new loans, the Government can pay the most expensive debts.
According to De la Torre, this would be the most viable option, in a context like the current one, in which a bond issue in the international market is “impossible”, because the country risk index was at 706 points until yesterday. The higher this indicator is, the more expensive it is for a country to issue bonds.
The former Minister of Finance, Marco Flores, points out that in these two cases, the creditors could request from Ecuador “important collateral or guarantees to improve the conditions”. For this, the Government has the option of putting into practice another of the measures of the Prosperity Plan, the monetarization of State assets.
“Monetarization can be understood as selling these goods or using them as collateral for loans,” says Flores. According to this Plan, projects such as the National Electric Transmission Network or the Coca-Codo Sinclair hydroelectric plant and the Paute System, among other projects, can generate more than USD 800 million annually. (I)