- The government of the Republic of Ecuador has diversified its funding sources and pursued more pragmatic economic policies over the last two years.
- The government's large fiscal deficits over the past two years, continued high dependence on oil revenues, and poor debt payment track record continue to constrain our ratings on the government.
- The stable outlook reflects our expectation that the government will continue to diversify its funding sources over the next two years to meet its financing needs over the same period, including the $650 million 2015 bond, which the government has declared legitimate.
MIAMI -- Standard & Poor's Ratings Services (S&P) has raised its long-term sovereign credit ratings on Ecuador to 'B+' from 'B'. The outlook is stable.
At the same time, S&P affirmed their 'B' short-term issuer credit ratings on Ecuador and raised their transfer and convertibility (T&C) assessment to 'B+' from 'B'.RATIONALE
"We raised the long-term ratings on Ecuador as a result of the government's greater fiscal flexibility, better external liquidity position, and the improving investment climate in the country," S&P said in a statement. "Over the past two years, the government has shown greater signs of pragmatism with efforts to attract foreign direct investment in the oil and mining sectors, re-engage multilateral institutions such as the International Monetary Fund and World Bank, and boost public investment to try to stimulate economic growth and increase its renewable energy sources, especially hydroelectric projects."
In June 2014, Ecuador issued a $2 billion international bond, which helped diversify its funding sources as well as boost its external liquidity.
These efforts are likely to improve the government's balance of payments position as well as underpin economic growth prospects.
"Ecuador's poor payment history remains one of the key constraints on our ratings, most recently in 2008-2009 with the default on its 2012 and 2030 bonds," said S&P. "Furthermore, President Rafael Correa's Administration continues to centralize authority over the government and take measures to curb the media, which limits checks and balances, limits policy debate, and reduces transparency. However, over the past two years, the government has actively pursued agreements with investors that did not participate in the 2009 bond exchange. As a result, less than $100 million of the repudiated 2012 and 2030 bonds remain outstanding, and these holdings are atomized across many
bondholders. Thus, we believe that the risks from a negative court ruling from the holdouts are low; there are currently no cases in the courts pertaining to these defaulted bonds."
There are, however, a number of court cases related to commercial disputes, largely pertaining to breaches of contract in the resource sectors.
"Economic growth is solid on the back of a decade of monetary stability and the government's large infrastructure program, which totaled 12% of GDP in 2013. We expect real per capita GDP growth of 2%-3% per year over 2014-2017, largely
because of investment, especially public-sector investment."
"While the road, airport, and hydroelectric projects will improve Ecuador's productivity, the government's significant capital spending has contributed to a large general government deficit, which reached 4.7% of GDP last year. The government debt and interest burdens, while low, are rising quickly, fueled by large general government deficits. We expect net general government debt to rise to a 27% of GDP in 2014, up sharply from 16% of GDP in 2009. The government debt stocks appear low due to the government's repudiation of the two bonds. We project the general government interest burden will rise to 5%
of revenues by 2017 from 2.6% in 2013."
"Since adopting the U.S. dollar as legal tender in 2000, the Central Bank of Ecuador has forfeited its monetary policy flexibility and its ability to act as a lender of last resort. In part to maintain a buffer against external shocks, the central bank requires a reserve requirement of 5% of deposits, which totaled more than $1.6 billion as of December 2013. We deduct this amount from the central bank's gross international reserves when calculating usable reserves."
Our 'B+' T&C assessment is the same as the long-term foreign-currency rating, reflecting our opinion that the likelihood of the sovereign restricting access to foreign exchange that Ecuador-based nonsovereign issuers need for debt service is similar to the likelihood of the sovereign defaulting on its foreign currency obligations. In a downside scenario, the government of Ecuador could decide to stop using the U.S. dollar and instead re-introduce its own local currency. The T&C assessment reflects our belief that there is a moderate risk of de-dollarization.OUTLOOK
The stable outlook balances the improved external financing options, solid growth prospects, and low debt and interest burdens with the government's poor debt payment culture and lack of monetary policy flexibility. The outlook also signals that we do not expect to change our ratings on Ecuador in the next year. Further out, we could raise the ratings if the government's fiscal profile and the country's external liquidity improve markedly. Two large new hydroelectric projects are likely to begin operations in 2016 that would cut Ecuador's refined fuel imports and boost oil exports by 2017. Additionally, the government has pledged to reduce fuel subsidies, which could significantly lower its fiscal deficits.
Conversely, we could lower the ratings if the political environment weakens or higher-than-expected fiscal deficits lead to external pressures. A weakening commitment to dollarization could also lead to a downgrade. Our stable outlook incorporates our judgment that we do not expect the new Monetary and Financial Code, which is expected to become law this year, to diminish the credibility of dollarization.