Ecuador pays a lower interest rate on its public debt

RIO DE JANEIRO, BRAZIL – The average interest rate on Ecuador’s public debt stood at 3.99% in February 2022. It was the lowest indicator since 2019, when the financial cost was 6.16%.

The drop occurred due to a reduction in the interest rate of external debt, which went from 6.2% in December 2019 to 3.2% in February 2022.

One of the reasons lies in the renegotiation of Ecuador’s bond debt tranche, which took place in August 2020.

At that time, the country managed to reduce the original principal of the Global bond debt from US$17.4 billion to US$15.8 billion.

Ecuador also reduced the average interest rate on these securities from 9.2% to 5.3%.

Another factor in reducing the financial cost of foreign debt is the access to cheap credit from multilaterals.

Organizations such as the International Monetary Fund (IMF), the Inter-American Development Bank (IDB), and the World Bank have lent to Ecuador at an average rate of 1.9%.

STILL ONEROUS DEBT

China is an onerous debt for Ecuador because the interest charged for financing is high and because of the terms.

Ecuador’s debt balance with China amounts to US$4.8 billion as of February 2022. Of these obligations, 58%, or US$2.8 billion, matures in 2024 and 2025.

In addition to short maturity, these debts of US$2.8 billion have the highest interest rates paid by Ecuador to China, ranging from 6.20% to 7.25%.

To alleviate the payments of the obligations, Ecuador started a debt renegotiation process with China in April 2022.

The credits also include the commitment to sell oil in the long term, which implies higher costs for Ecuador, says Fausto Ortiz, former Minister of Finance.

There are three contracts in force between Ecuador and China’s two largest state-owned oil companies, one with Unipec, a subsidiary of Sinopec, and two with Petrochina, a subsidiary of the giant CNPC.

These contracts commit Ecuador to deliver 121.4 million barrels of oil to the two companies between 2022 and 2024.

Ítalo Cedeño, manager of Petroecuador, has pointed out that the conditions of the oil sales contracts with the Chinese companies can be improved.

The main proposal is to simplify the formula with technical and market variables to avoid losses in the sale of oil with China which, according to Petroecuador, are US$3.6 per barrel.

IESS, A COSTLY CREDITOR

Unlike external credit, the financial cost of Ecuador’s domestic debt has grown from 5.8% in December 2019 to 6.35% in February 2022.

One of the most onerous obligations is with the Ecuadorian Social Security Institute (IESS).

Until February 2022, the State’s debt with the institute totaled US$8.4 billion and had an average interest rate of 7.55%.

With low interest rates and comfortable terms, a good profile allows for meeting obligations without complicating other expenses that a State must make.

Therefore, according to Ortiz, the Government should reduce the domestic debt, seeking better terms and rates with the IESS in new issues.

A limiting factor to achieving this objective is Ecuador’s country risk, which is still high.

The indicator that measures the probability of a country meeting its obligations closed in April at 816 points.