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Ecuador election influenced by U.S.-China friction

. Feb 05, 2021
"Ecuador will not be the next IMF colony," reads sign during 2019 protest. Photo: Tommo T/Shutterstock "Ecuador will not be the next IMF colony," reads sign during 2019 protest. Photo: Tommo T/Shutterstock

The announcement of a USD 3.5 billion credit line to help Ecuador pay off its debt to China hinted toward a confrontational approach of the recently formed U.S. International Development Finance Corporation (DFC) to Chinese finance in Latin America. While foreign policy is admittedly low among voter concerns ahead of Ecuador’s presidential elections on Sunday, the DFC loan puts the leading candidates’ choice of partner in even sharper focus, with the country in need of international support to recover from the pandemic.

Signed by outgoing President Lenin Moreno, the DFC loan is conditioned to Ecuador excluding Chinese technology from its telecoms sector. DFC CEO Adam Boehler said the agreement will allow Ecuador to “refinance predatory Chinese debt” and help it improve the value of its strategic assets.

</p> <p>However, according to Paulina Garzón, director of the China-Latin America Sustainable Investments initiative, by using its financial muscle to support foreign policy goals, the DFC’s actions are similar to those of Ecuador&#8217;s other major creditors: the China Development Bank and the Export-Import Bank of China.</p> <p>“The loan is clearly intended to strike at Ecuador’s relationship with China,” Ms. Garzón said, in a phone interview. “I think it is ill-advised. It has amplified the debate about which power Ecuador aligns with. When it is scrutinized, I think it will be rejected by the public.”</p> <iframe src="https://open.spotify.com/embed-podcast/episode/0MhYeM93rKuQp0EvqN9GXI" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <p>Leading the polls ahead of Sunday&#8217;s vote are <a href="https://brazilian.report/latin-america/2021/01/04/the-legacy-of-the-liberator-and-modern-day-bolivarianism/">left-wing</a>, China-friendly candidate Andrés Arauz, and Washington-allied conservative banker Guillermo Lasso — a supporter of Mr. Moreno’s 2019 International Monetary Fund-backed austerity plan. The outgoing president&#8217;s attempt to balance the budget through cuts to energy subsidies led to <a href="https://brazilian.report/podcast/2019/10/30/explaining-brazil-latin-america-veins-wide-open/">mass protests</a> and stoked the enmity of <a href="https://brazilian.report/latin-america/2020/12/05/south-american-leaders-love-a-proxy-presidents/">influential</a> former President Rafael Correa, Mr. Arauz’s mentor. Since then, Mr. Moreno’s approval ratings have slipped to single digits.</p> <p>With Ecuador under pressure from Washington to reject Chinese development finance and agree to its own conditions, voters seemingly face a stark choice. Do they side with China, or the U.S.?</p> <h2>Ecuador election and international alignment</h2> <p>While indigenous, anti-mining candidate Yaku Perez is polling well in third place, the most likely election scenario is a second-round run-off in April between Messrs. Arauz and Lasso. The 35-year-old Mr. Arauz says he has already “opened dialogue” with development banks in China, that Mr. Correa will be his main advisor, and that he will scrap the 2019 IMF deal.</p> <p>Under Mr. Correa, Ecuador borrowed USD 19 billion from Chinese policy banks to finance hydroelectric projects, roads, bridges and healthcare centres. However, the loans were agreed at high interest rates and under opaque conditions.</p> <figure class="wp-block-image size-large"><img loading="lazy" width="1000" height="667" src="https://brazilian.report/wp-content/uploads/2021/02/shutterstock_1608929467.jpg" alt="ecuador Anti-China conditions attached to a new loan from the U.S. Development Finance Corporation underscore candidates’ international leanings ahead of Sunday's election" class="wp-image-56219" srcset="https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/shutterstock_1608929467.jpg 1000w, https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/shutterstock_1608929467-300x200.jpg 300w, https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/shutterstock_1608929467-768x512.jpg 768w, https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/shutterstock_1608929467-600x400.jpg 600w" sizes="(max-width: 1000px) 100vw, 1000px" /><figcaption>&#8220;Austerity kills,&#8221; reads sign during November 2020 protest in Quito. Photo: Gabriel Pinto/Shutterstock </figcaption></figure> <p>“When Ecuador defaulted on its bonds in 2009, China became the lender of last resort and that led to two issues: high financial costs and increased corruption,” says Santiago Mosquera, head of research at Analytica Investments, a Quito-based financial advisory firm. “When you take into account that the oil-backed China loans have <a href="https://brazilian.report/latin-america/2019/11/23/latin-america-boom-bust-frustrations/">financial costs</a> close to 8 percent, the terms of the DFC deal look very generous.”</p> <p>The DFC loan carries an annual interest rate of 2.48 percent and has a maturity of eight years. It also has a one-year grace period, according to Latin Finance.</p> <p>Meanwhile, China-backed hydro projects have experienced costly delays, caused environmental disasters, and slowed the uptake of other renewable forms of energy. Thanks to the closer political ties created by the loans, Chinese companies increased their presence in the mining sector and now own three of Ecuador’s five largest mines.</p> <p>“The goal of the dams was to create a cleaner energy matrix,” says Ms. Garzón. “Not only did they fail in that goal but they generated an economic cost that led to increased extractive industry activity.”</p> <p>Were Mr. Arauz to be elected, a default on the <a href="https://brazilian.report/latin-america/2020/05/06/more-imf-loans-in-latin-america-dig-up-troubled-memories/">IMF loan</a> would make Ecuador <a href="https://brazilian.report/latin-america/2020/04/13/china-continues-latin-america-loans-pandemic-coronavirus/">dependent on China</a> once again, says Mr. Mosquera. “The government could commit extra oil to get a new loan from China, but after that there are very few sources of liquidity in the domestic market.”</p> <p>In contrast, Mr. Lasso, a centre-right businessman and former economy minister taking his third shot at the presidency, has supported President Moreno’s orthodox economic policy and would represent continuity. In August 2020, Mr. Moreno agreed a lending program with the IMF to restructure USD 17.4 billion of Ecuador’s debt and receive an additional USD 6.5 billion credit line. However, without strong economic growth and fiscal reform, the package always looked unlikely to improve the situation, as Fitch Ratings reported at the time.</p> <p>The timing of the DFC loan is a sign of U.S. support for Mr. Lasso’s candidacy, according to Mr. Mosquera.</p> <p>“It isn’t a budget support loan, it’s a line of credit linked to projects and it can be withdrawn,” he says. “If Mr. Arauz wins and goes with China, Ecuador will lose not only the U.S.’s goodwill but its money as well.”</p> <h2>Dependence on oil</h2> <p>A significant proportion of the DFC credit line will go towards Ecuador’s oil sector and the USD 3 billion refit of the Esmeraldas Refinery, being undertaken by U.S. and Korean firms. It is also understood that the DFC loan was only made possible by Ecuador’s decision to join the U.S.&#8217; “Clean Network” program — which forbids the use of Huawei equipment in 5G networks.</p> <p>“All of these conditions put pressure on Ecuador and other countries but at the same time the World Bank and other financial institutions are not equipped to disperse the money required,” says Ms. Garzón.</p> <p>Ecuador needs a variety of international partners. But, in late January, it saw three major European banks commit to end loans to oil companies working in its Amazon region. Despite this, Ecuador’s presidential hopefuls will seek backing for the sector from other sources, likely to include China in some capacity, Ms. Garzón says.</p> <p>“Whoever provides the loans, we are seeing that developing country governments are focusing on extractive industries as important drivers of economic recovery.”</p> <hr class="wp-block-separator"/> <p class="has-text-align-center"><em>This article was originally published by <a href="http://dialogochino.net/">Dialogo Chino</a> and republished under the Creative Commons license</em>

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Mat Youkee

Mat Youkee is a Bogotá-based freelance journalist and Latin America analyst.

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