Latin lender

Who wants to be a lender of last resort nowadays? Not the Germans, it seems, who are fed up with the continuing requests to bail out their more profligate European neighbours.

But over in Ecuador, China seems ready to take on the role, having lent billions of dollars to Rafael Correa’s administration in recent months.

The first tranche came in August 2009, with a $1 billion loan in pre-payment for future oil flow, and was followed by a term sheet a year later for another $1 billion from the China Development Bank (CDB) for infrastructure projects.

There was a further $1 billion in February this year, stumped up by PetroChina in advance payment for another oil contract. Then China Exim Bank agreed to finance a $1.7 billion hydropower plant last month, followed almost immediately by news of another $2 billion deal for hydropower, structured again as an advanced purchase for Ecuadorean oil flow.

Correa’s government is going to the Chinese because it has little option to raise money elsewhere, having chosen to default on its international bonds in 2008. That means tough payment terms with Beijing, say analysts. For those oil-backed loans, supply is being locked in at a discount as much as 28% below crude’s market price.

The wider context here is China’s steady advance into Latin America, with a report from the Economic Commission for Latin America and the Caribbean (ECLAC) in May highlighting a massive pick up in the investment pace to $15 billion of Chinese FDI last year, equivalent to the previous 20 years combined.

According to ECLAC, a further $22.7 billion was committed in the first five months of 2011.

But for smaller countries like Ecuador, it is Chinese loans that are making headlines. Analytica Research, an investment advisory firm based in Quito, says Ecuador now owes three-quarters of its oil exports to the Chinese. The proposed hydropower plants (to be built by a Chinese construction firm, and to provide three quarters of Ecuador’s power supply) are also 85% reliant on Chinese funding.

Does this lead to a dependency on Chinese cash? Reuter’s columnist Felix Salmon suggests loan capital from China now runs to 18% of Ecuadorean GDP.

Not that the Correa government is ready to cut back on its credit line, with speculation that it will go back for more next year. “There is a strategic relationship with China,” Ecuador’s Planning Secretary Rene Ramirez told reporters last Thursday. “We need investment and China needs energy.”

On the face of it, a compelling sound bite? Beijing is chasing down natural resources even as Latin American manufacturers gripe at the flood of cheap Chinese exports coming in their direction.

Still, to detect some kind of dastardly ‘China Inc’ plot to cherry-pick the continent’s best assets is probably an exaggeration. The ECLAC data on cumulative investment in Latin America shows China third behind the US and the Netherlands, although Heineken’s purchase of Mexican brewer FEMSA skewed the figures. Unlike some of the China warnings, there has been a lot less muttering about the Machiavellian genius of the Dutch brewing giant…

Of course, it’s a reasonable guess that China’s share of investment will grow rapidly in future, pushing it closer to the top of the pile.

Erica Downs, a researcher at the Brookings Institution, agrees that the China spending spree has been shaped by policy goals. Energy-backed loans have also been prominent in meeting State Council priorities, like China’s strategy to secure access to resources like oil.

So a final question is how this new engagement is going to turn out for China, particularly in less-than-predictable jurisdictions.

Back to Ecuador, and CDB has tried to reduce risk in its lending to Quito by insisting on legally-binding arbitration occurring in London in the event of dispute.

But with such limited alternatives open to the Correa administration for raising capital, Ecuador may have little choice but to pay up in full, and keep the oil flowing.

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