Latin American countries are ramping-up national spending thanks to cash-for-oil loans from the China Development Bank.
Venezuelan President, Hugo Chavez, and his Ecuadorian counterpart, Rafael Correa, have both secured more loans from the China Development Bank (CBD) in exchange for oil. Since 2009, Ecuador has signed loans for $7.3 billion from China, around one-third of the country's annual budget. A drop in the ocean, however, compared to Venezuela, who have $42.5 billion collateralised by revenue from its oil reserves.
On top of the $7.3 billion, Correa is also looking for a further $1.7 billion to fund growth. Ecuador defaulted in 2008 after it could no longer borrow from international markets and was therefore compelled to seek Chinese funding. The nation, home to South America's third-largest oil reserves, has since used the money to boost public spending by 9% in 2012. Moody's, the global rating agency, has since increased its credit rating for the Latin nation as a result of the investment.
In Venezuela, loans to the Chavez administration now consititute 23% of all overseas loans by the CBD, which has been lending generously to energy-rich countries over the last few years. Chavez accepted $16 billion from the CDB in 2007, $20 billion in 2010 and is now seeking a third credit line for 2013 – all of which were paid in a mixture of renminbi and US dollars. This debt is being slowly serviced with the 200,000 to 640,000 barrels per day that Venezuela sends to China.
The glut of loans has helped the South American economy increase spending on social welfare and infrastructure, curb inflation and avoid costlier loans from other international banks. Liu Kegu, the CBD's adviser to Venezuela, sees the situation as win-win: “We have lots of capital and lack resources, they have lots of resources and lack capital, so its complementary.”
Linking loans to commodities which are guaranteed in the near future could work in China's favour in a tumultuous global market. However, if oil prices drop and the cost of servicing the loans increases, Chavez's spending boom will come to an abrupt halt. A report by Morgan Stanley claimed that Venezuela may default on its debt as early as the second half of 2013 if the government does not find a way to secure its “increasingly fragile” finances.