Ecuador: a successful emerging market?

June 30, 2014

A colleague of mine, Marius Zaharia (@MZaharia) interviewed Moritz Kraemer, Standard and Poor’s head of sovereign ratings for Europe, Middle East and Africa. (you can read the interview here) Kraemer offered this piece of advice to the African governments who are busily tapping bond markets these days:

    What I want to tell all those governments in africa is that you are not a successful market participant when you’ve issued your first eurobond. You are a successful participant when you’ve paid it back for the first time.   

A sound piece of advice. But where does that leave Ecuador which has a frequent history of default spanning three centuries? One might argue in fact Ecuador’s market strategy has been highly successful — not only has it avoided repaying creditors, it also seems adept at persuading them to part with more cash at regular intervals.

It did just that a few weeks ago, raising $2 billion at a sub-8 percent yield just six years after President Rafael Correa (still in office today) repudiated $3.2 billion in bonds issued by a prior government. And what’s more, Quito said this week it could come back to the market soon to borrow more.

Chances are this too will be successful. Investors submitted bids worth $5 billion for the June bond which was initially billed as a $700 million issue. Many were lured by Ecuador’s fairly low public debt ratios (partly a result of past defaults) and a relatively high yield. It has also been making the right noises of late, having opened talks with holdouts from its 2009 restructuring and inviting reviews by the IMF and World Bank.

One fund manager speaking on condition of anonymity said he had participated in the deal but sold the issue soon after because of strong secondary market demand – the bond rose 3 points the day after issue so the investor would have made a neat profit.

Yet the majority are no fan of the credit. Angus Halkett, a fund manager at Stone Harbor, says Ecuador set the worst possible example to new emerging market bond issuers of how not to deal with investors.

This is an environment where people want yield and there is willingness to forgive. On a top-down level their repayment capacity is quite good but if anything changes with the government there is the risk that their willingness to pay also changes, as was the case in 2008.

However analysts at risk consultancy Eurasia Group warn investors not to be misled by Ecuador’s recent conciliatory moves, which it says are motivated by necessity rather than any ideology shift. The government has a $4.9 billion deficit this year, and public spending is over 40 percent of GDP. They write:

Though Correa is currently on a charm offensive with potential creditors, he is prone to ad-hoc policymaking and is highly mercurial, so his commitment to a more conciliatory stance should not be overestimated.

On the positive side though, Ecuador is promising to repay the $650 million in bonds that fall due next year. If it does manage to do that, it will become a truly successful market participant as per S&P’s yardstick.

 

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