15 January 2015

Bondholders Embracing Chavez’s Disciple in Ecuador: Andes Credit

By Nathan Gill
(Bloomberg) -- Nicolas Maduro and Rafael Correa are both socialist disciples of the late Venezuela President Hugo Chavez, but only one is managing to convince bondholders he’s got the ability to weather the collapse in oil prices.

While Chavez’s handpicked successor Maduro is struggling to ward off a default, Ecuador counterpart Correa is getting a vote of confidence as he cuts spending and lines up more than $7.5 billion in loans from China. Ecuador’s benchmark notes due 2024 have gained 2.3 percent in the past month, compared with a 16 percent plunge in similar-maturity Venezuelan securities.

Correa, who has long allied himself with Chavez’s socialist ambitions and declared three days of mourning to mark his death, is now deviating from policies that saw him use Ecuador’s oil wealth to finance record spending. Maduro’s refusal to break with the currency controls and gasoline subsidies embraced by Chavez is deepening concern that Venezuela, which gets about 95 percent of its export revenue from oil, will run out of money as soon as this year.

“The real clear difference is coming out in terms of the quality of leadership and how that’s going to help some countries escape potential crises,” Bryan Carter, who helps manage about $360 million of emerging-market debt at Acadian Asset Management, said by telephone from Boston. Maduro “is not very creative with problem solving, so he’s not inventing solutions like we see with Correa.”

China Trip

The press office of Venezuela’s Finance Ministry didn’t respond to e-mail or telephone messages seeking comment on the planned economic measures or investors’ perceptions of Maduro’s leadership.

Correa, a 51-year-old former economics professor who came to power in 2007 touting his ties to Chavez, last week traveled to China, the world’s biggest crude importer, to ask for loans as the price of the country’s Oriente crude fell to $40.93 a barrel.

Ecuador, an OPEC member that relies on oil to finance about a quarter of revenue, said Jan. 6 that the Export-Import Bank of China granted it a $5.3 billion, 30-year loan with an interest rate of 2 percent. The next day the ministry said it obtained a total of $7.5 billion in credit and loans from the Asian nation.

And while Maduro also said last week he obtained $20 billion of investment from the Asian nation after his own visit, he didn’t provide details as to whether the money was in cash or longer-term contracts. Since the announcement, derivatives traders have pushed the likelihood Venezuela will default in a year to 80 percent.

Spending Cut

Ecuador unveiled its loan from China a day after the government said it would cut the 2015 budget by $1.42 billion, or almost 4 percent. During his eight-year tenure, Correa had more than tripled public spending. He has a Ph.D. from the University of Illinois at Urbana-Champaign.

“With the budget cut and investment that we’ve received, we can balance public finances with an oil price much lower than $40 a barrel,” Finance Minister Fausto Herrera said in a interview at his office in Quito. “I’m not someone to give lessons to Venezuela, nor would I like it if they gave me lessons from outside Ecuador. But we’ve always said that when a brother country like Venezuela needs the Ecuadorean government’s help, we’ll be ready to offer it.”

‘True Monsters’

Correa’s reversal on spending is the latest sign he’s willing to depart from earlier policies. As oil prices slid last year, he reached deals with holdout creditors from a default on $3.2 billion of foreign debt that he had orchestrated more than five years earlier, when he dubbed bondholders “true monsters.” He also obtained loans from Goldman Sachs Group and the World Bank; previously he had cut ties with international lenders.

Moody’s Investors Service underscored the differences between the Andean nations when it cut Venezuela’s rating two levels to Caa3 this week, less than a month after lifting Ecuador’s grade one step to B3. The countries had been rated the same at Caa1, seven levels below investment grade.
While Maduro’s popularity continues to take a hit, Correa remains popular, with a 61 percent approval rate.

Correa “can get through pretty much whatever he wants,” Acadian’s Carter said.