Investors are becoming more pessimistic about Correa’s willingness to honour Ecuador’s debts, especially as there are doubts about how market friendly his new economy minister, Wilma Salgado, is compared with her predecessor, Fausto Ortiz, who resigned suddenly last month.
Ortiz’s resignation was reportedly in response to the government’s hard-line attack on the Isaias group, an important commercial group headed by brothers Estefano, Roberto and William. Isaias had assets seized after the government claimed it owed $661 million from the 1998 financial crisis. In total, 200 companies were reportedly seized, of which two were television companies that have been critical of the president in the past. The president claims all these companies will be sold to help investors recover lost savings. Estefano Isaias claims all debts to the government have been repaid in full.
"Correa won his election on a populist mandate and so every time he seizes assets from a big company or threatens to not pay external debt, he wins votes," says Elizabeth Stephens, political risk analyst at insurance broker Jardine Lloyd Thompson.
In September, Correa is holding a referendum on a new constitution. With Hugo Chávez’s humiliating referendum defeat in Venezuela in December high on Correa’s mind, some think this might be driving the recent seizures.
When Salgado was sworn in, she said: "There effectively is illegitimate debt; there is a series of irregularities that have been committed in the management of debt," adding that she would be taking action, putting social spending before debt repayments, citing the rhetorical "life before debt".
Restucturing considered
In 2007, Correa commissioned a report on Ecuador’s outstanding bonds to define whether some of its $10.2 billion in external debt, 25% of GDP, was irregular and whether a restructuring should be pursued.
Despite the rumbling threats of non-payment, fixed-income fund managers and analysts remain hopeful. "It is not in Ecuador’s best interests to default on its debt," says Stuart Culverhouse, chief economist at Exotix. "The government is in a liquid position at the moment and can still afford to honour its debt payments without having to squeeze its social spending – I think if this continues to be the case then Correa will have no real reason to default on payments."
Jerome Booth, head of research at Ashmore Investment Management, says: "On the surface Salgado’s appointment, and her comments when she was sworn in, were not conducive to reassuring investors. But she is just repeating the government’s line – threats to not pay debt have been part of the government rhetoric since January 2007 but nothing has been done yet – why should that change now?"
He adds: "I think the most relevant point is that the debt commission is reporting after the referendum. It’s unlikely that any decision on debt will be made until after the commission reports and so by the time a decision is made, it will be in a less politically charged atmosphere with fewer immediate political consequences."