Capital markets: Ecuador builds steam for international re-entry


Jason Mitchell
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Fitch upgrade a propitious sign despite default history; Oil-field developments and hydro-power prospects

Ecuador remains on course, following a credit rating upgrade by Fitch Ratings, to issue its first sovereign bond since its $3.2 billion default in 2008. It is expected to offer the debt this year or in 2014 and would follow the successful bond debuts of two other small Latin American nations, Bolivia and Paraguay, earlier this year. Neither the terms nor the amount of an Ecuadorian offering are yet known. Bolivia and Paraguay both sold $500 million.

In mid-October, Fitch Ratings upgraded Ecuador to B from B- and gave it a stable outlook; this followed a change in its outlook from stable to positive in 2012. Fitch said the latest move reflected the country’s continued healthy growth performance, as well as monetary and financial stability, underpinned by 100% dollarization of the economy. It added that a steady easing of external and fiscal financing risks as a result of still favourable international oil prices, improved prospects in the oil sector, as well as continued availability of bilateral financing from China and multilaterals also helped the nation’s prospects.

"Ecuador’s economic growth has slowed down a bit this year," says Erich Arispe, a director for Latin American sovereigns at Fitch Ratings. "However, the economy remains resilient and the government is committed to investing much more in improving infrastructure, which is badly needed."

Ecuador’s government, led by the leftist president Rafael Correa, who was re-elected in February this year, would probably first try to buy back bonds from creditors who refused to accept the terms of the 2009 debt repurchase (it bought back 94% of its defaulted bonds at 35 cents on the dollar). This move would reduce legal risks if any new bonds were to be issued. However, the terms for the holdouts are not likely to be any better than the 2009 repurchase offer.

The IMF forecasts GDP growth of 4% this year and the same amount in 2014. Inflation stands at a low 2.7% and dollarization has helped to keep it much lower than in some other Latin American countries, such as Argentina (at around 25%) and Venezuela (at more than 40%).

Since his re-election, Correa has been showing increasing signs of pragmatism, which have been welcomed by the markets. For example, he has put Jorge Glas, the vice-president, in charge of improving the productive sector of the economy. Glas has a great deal of technical expertise and is seen as highly hands-on by analysts.

One indication of Correa’s pragmatism was his August announcement that the country would attempt to extract oil from Yasuní National Park in the Amazon rainforest, one of the most beautiful and remote parts of Ecuador and home to endangered species such as the giant otter and the freshwater manatee. Analysts estimate that there are 840 million barrels of oil in the area (a part of the park called Ishpingo-Tambococha-Tiputini – ITT), which the government now values at $18 billion. Previously, Correa ruled out exploiting the reserve if the international community put up $3.6 billion, half its estimated value by the government at the time, because of its outstanding natural beauty and importance to the planet’s ecosystem. This money was not forthcoming, so the ITT field will be assigned to Petroamazonas, a state company, which has pledged to minimize disruption to the environment. It is expected to enter into service contracts with foreign oil companies.

Ecuador has had a poor relationship with the IMF and the World Bank and neither organization has granted it a credit line. However, it has had the beginnings of a rapprochement with the World Bank and there is the possibility that the multilateral might start lending to it. The only multilateral that has been supporting it with loans has been the Inter-American Development Bank.

Sarah Glendon, an assistant vice-president in the sovereign risk group at Moody’s
Sarah Glendon, an assistant vice-president in the sovereign risk group at Moody’s
Like Venezuela, the country has become highly dependent on Chinese credit. China is contracted to lend it up to $11 billion and has already granted $9 billion of that (although Ecuador has paid a small proportion back).

Analysts estimate that the cost of developing the ITT field will be between $12 billion and $15 billion, and Ecuador is engaged in talks with the Chinese authorities about financing the project. Venezuela has also offered to invest $1 billion. In return, China would receive a large chunk of the reserves, but the countries have yet to agree terms.

"If Ecuador manages to diversify and improve its access to funding, including through a bond issue, that would be seen as a credit positive from our perspective," says Sarah Glendon, an assistant vice-president in the sovereign risk group at Moody’s. "It is also developing hydroelectric power, another positive as it would reduce the country’s dependence on imported refined oil for its energy needs."

Ecuador is likely to pay more for its debt issue than Paraguay and Bolivia, which attained yields of 4.625% and 4.875% respectively, because of its poor default history. The nation’s current sovereign bond interest rate spreads lie at 670 basis points over US treasuries.