Under Duress, Ecuador Considering Another Oil-for-Loans Agreement with Beijing

On June 15, El Comercio reported that Petroecuador, Ecuador’s state-owned oil firm, is considering entering a new five-year oil export contract with China in exchange for $2.4 billion in Chinese state financing between June and October 2020.  The deal would mark a relapse for Ecuador, which, after the rise of President Moreno, had sought to move away from its dependency on oil-for-loans deals with Beijing that characterized the country’s strategy for external financing over much of the previous decade under Moreno’s predecessor, Rafael Correa.

Between $300 million and $400 million of the proposed loans would reportedly be used to pay down Quito’s existing debt to the Industrial and Commercial Bank of China (ICBC).  The deal would send an additional 50+ million barrels of oil to China over the next five years.

Under President Correa, Ecuador became China’s third largest borrower in Latin America and the Caribbean, receiving $18.4 billion in financing between 2010 and 2019.  A portion of these loans was granted in exchange for oil shipments, similar to those China has employed in other oil-producing states, including Venezuela and Angola.  As a result, Ecuador accrued considerable debt to China, $6.5 billion of which was outstanding as of 2018.  The deals also mortgaged Ecuador’s oil production to China, with El Comercio estimating that Ecuador is currently utilizing 98% of its internationally marketable oil to meet its contractual obligations with three buyers (PetroChina, Unipec, and Petrotailandia).  Although this amount was set to decline to 75% in 2021, a new financing agreement would likely undermine that trajectory.

Despite President Moreno’s initial efforts to escape Ecuador’s dependency on Beijing for financing, his efforts produced mixed results.  In May 2018, for example, Ecuador and three Asian creditors (PetroChina among them) agreed to adjust the formula utilized in some of the oil-backed loan deals, which was supposed to provide Quito with an additional $3.5 billion (as well as a further $561 million).  Later that year, however, President Moreno was reported to have brought up the issue of debt relief during a state visit to Beijing, only to return with a new loan for $900 million.  China is Ecuador’s largest bilateral creditor, representing 64% of Quito’s debt to state creditors.

Ecuador’s likely return to Chinese state financing—especially after President Moreno’s attempts to rebalance the relationship—reflects the country’s delicate economic situation, as well as the effectiveness of easy access to credit as a tool of Beijing’s influence.  Although the deterioration of Ecuador’s economic situation has led Quito once more to look toward China for loans, Quito has also turned to the IMF, which is currently providing rapid financing to the country.