Debt restructuring

Ecuador reaches an agreement to restructure its debt with China as others join the queue.

The government of Ecuador issued a press statement on 19 September announcing that it reached an agreement to restructure its debt with the China Development Bank (“CDB”) and the Export-Import Bank (“Exim”) of China. The measure, which includes the conditions of long-term oil sale contracts, will provide Quito with USD 1.4 billion of economic relief until 2025.

Guillermo Lasso, President of Ecuador, said that the deal prevented the government from having to carry out severe budget cuts in public spending at a time when the government is negotiating social reforms with indigenous leaders following last June’s protests.

A former deputy Minister of Economics in Ecuador provided some context, “Taking a step back, in 2018, about a third of Ecuador’s external debt was with China, a third with multilaterals and a third with bonds. Today, Chinese debt is only 8% and that is because from 2018 to 2022 that debt has been repaid and no more has been issued with China.” Ecuador’s fiscal standing has rapidly improved, thanks to high international oil prices, which has allowed the country to exceed the target agreed with the International Monetary Fund (“IMF”) for the year. The former Minister of Economy said, “At this rate, Ecuador would not need any external financing by 2023.”

“Taking a step back, in 2018, about a third of Ecuador’s external debt was with China, […]. Today, Chinese debt is only 8%.”

Former deputy Minister of Economics, Ecuador

Elsewhere in Latin America, Argentina, Venezuela, and Suriname have larger debts with Beijing. Both Argentina and Suriname are currently engaged in a debt renegotiation process with Beijing, hoping that China offers grace periods for loan replacements as it has done with Ecuador. In parallel, Bolivia is negotiating a USD 7.5 billion deal with China which, added to the current USD 1.3 billion debt would make Beijing the main creditor of the Andean country.

Despite this latter deal, the economic crisis caused by Covid-19 resulted in CDB and Exim almost halting new sovereign lending to Latin American countries. Instead, these state-owned banks have adopted a more risk-averse strategy and have shifted their focus on both existing overseas projects and supporting China’s growth efforts. Nevertheless, the pandemic was the confirmation of a decreasing annual lending trend in Latin America which reached its peak in 2015 with USD 21.3 billon lent to the region.

A Mexican academic urged some caution with this analysis, “It is important to understand that very few people know how much Latin American debt China holds. Even senior politicians are basing decisions on summary data. For example, if the Chinese government lends money to a state-owned enterprise and that company enters Mexico, it is not recorded formally as Chinese debt. I have found that the best source of data is Boston University’s Chinese investment and loan tracker but even that isn’t perfect.”

“China is trying to repair its bad image caused by being so tough on its debtors in the past.”

Diplomat with decades of experience negotiating with China

Despite imperfect data, it seems beyond doubt that Chinese lending to the region is slowing and interestingly China seems to be taking a softer approach on collecting, an Argentine diplomat with decades of experience negotiating with China thought this was deliberate foreign policy, “China is trying to repair its bad image caused by being so tough on its debtors in the past. Taking control of a port in Sri Lanka was a violent measure that spooked markets. With Venezuela they were also very tough, but without drawing attention to themselves. Venezuela paid its debt every month. In kind, but it paid. It never defaulted. In Ecuador’s case, they were almost bankrupt, so the cancellation of this part of the debt by China was very significant.“

China’s future influence in the region lacks a unified framework for cooperation and each country is now seeking to reevaluate its position with Beijing separately. For example, while President Gustavo Petro is likely to strengthen Colombia’s ties with Beijing, President Gabriel Boric of Chile is growing more wary of the perils of his country’s dependency on China.

An Argentine diplomat concluded, “Looking ahead, China will have to extend similar benefits to other debtors in Latin America and the Caribbean. The question is whether it will be that significant. Venezuela is surely already negotiating a cancellation. But I don’t think it will reach the 20% that Ecuador received because Venezuela’s debt is very high. Argentina has almost all its debt through commercial loans and not concessional loans, so it is more difficult.”

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