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Selling a sovereign bond deal: Ecuador’s president Lucio Gutiérrez has taken a personal hand in interesting investment banks in a bond issue and bond restructuring |
With two presidents overthrown by popular unrest since 1997 and a debt default in 1999, politically volatile Ecuador has largely been exiled from international capital markets in recent years, unable to tap into investor demand for high-yielding emerging-market paper.
That looks set to change this month, when the Andean nation plans to issue its first new debt since it defaulted six years ago. It will also swap its 2012 global bonds for new paper that will cost less to service.
Finance minister Mauricio Yépez hopes Ecuador can sell about $300 million in five-year sovereign bonds and at the same time hold a voluntary swap of $1.25 billion for bonds with a lower rate than the 12% interest charged on the 2012 globals. Ecuador’s president, Lucio Gutiérrez, went to New York in January to try to sell the deal to fund managers. While Deutsche Bank and JPMorgan are expected to handle the issue, investment banks have until February 14 to submit their offers to the government.
The expected bond issue, which will likely be used to help finance the 2005 and 2006 budgets, comes after a turnround in Ecuador’s economy and in its fiscal accounts. The oil-exporting nation has enjoyed five straight years of economic growth and is now on course for $400 million in loans from the World Bank and other multilateral lenders this year, something that has helped bring its country risk down to below 700 basis points over US treasuries. The economy grew almost 8% in the third quarter of 2004 and is expected to meet a full-year target of 6% for the whole of 2004, making it one of the fastest-growing economies in Latin America last year.
A 25% rise in oil production and 20% rise in oil income drove last year’s strong expansion, and a healthy fiscal surplus has boosted investor confidence. Growth is expected to cool to 4% in 2005, as oil production dips in line with a slowdown in the world economy, but a move to make the US dollar Ecuador’s official currency has kept inflation down even at a time of rapid growth.
Consumer prices rose to 30-year lows of just under 2% last year, compared with inflation of 6% in 2003. The debt ratio has fallen to 270% of GDP from 520% in 1999.
Political instability
But Ecuador is still dogged by its political instability, something analysts see as the biggest risk to attracting investment. Gutiérrez, a retired army colonel who helped topple former president Jamil Mahuad in a coup in 2000, was elected as a left-wing radical in 2003. But he quickly began to direct the economy along free-market lines and negotiated with the IMF to restructure debt and win a loan programme, losing support among the poor.
Opposition parties have tried to impeach the president, accusing him of misusing public money in a local election campaign. He has replied by firing the entire Supreme Court, which he said gave too much support to the opposition. He is now seeking to pass a law that would allow the government to dissolve Congress, but is under pressure to raise public sector wages and pensions. His weak standing could affect his plans to open up the electricity, oil and pension sectors to private investment.
Gutiérrez is readying electricity reform, a hydrocarbon law reform, and social security reform to send to lawmakers in a single package in February, but the friction with the opposition has dampened the likelihood of getting these through in the short term.
?We believe the reform package on the way to Congress is unlikely to pass but the government would still benefit by demonstrating good faith (to investors) in trying to pass these particular reforms,? says Jan Dehn, a London-based analyst at Credit Suisse First Boston.
The IMF has said it is worried by the political conflict and while Gutiérrez is expected to finish his four-year term, an increase in political turbulence could push key economic reforms down the agenda. Non-oil related sector growth such as fishing and agriculture is weak, while Ecuador’s oil is low-quality crude and sells at a discount on international markets. ?Further modernization of Ecuador’s economy is crucial to maintaining a high rate of economic growth, improving fiscal accounts and increasing the economy’s resilience to shocks,? says Moody’s analyst Luis Martinez-Alas.
?But fractious tensions in government have hampered progress.?
