12 February 2015

Bondholder Love for Ecuador’s Correa Is Questioned: Andes Credit

By Nathan Gill
(Bloomberg) -- President Rafael Correa’s resourcefulness in the face of sinking oil prices has made Ecuador a favorite among emerging-market bond investors this year.

To AllianceBernstein and Capital Economics, Correa needs to do more to ensure that the goodwill doesn’t prove fleeting.

The nation’s debt securities returned 4.9 percent as Correa said he’d cut spending for the first time since taking power in 2007 and lined up more than $7.5 billion in loans from China. That gain, the biggest in emerging markets behind Belize, is a sign of investor confidence in the OPEC nation’s ability to weather a 53 percent plunge in crude prices since June.

But with Ecuador needing a record $10.5 billion to cover its total financing needs this year, Correa can’t afford to rest on his laurels, said Marco Santamaria, a money manager at AllianceBernstein, which oversees about $27 billion in emerging-market debt. While Ecuador’s borrowing costs have tumbled from a four-year high in December, at 9.9 percent, they’re still the highest in Latin America after Venezuela.

Bond prices will be “held hostage to the vagaries of oil prices and, to some degree, the market’s going to pay attention to whether or not the fiscal-adjustment program is carried out,” Santamaria said by telephone from New York.

China Loans

The Finance Ministry’s press office didn’t reply to an e-mailed request for comment on the nation’s bonds and measures to further bolster the nation’s finances. The Economic Policy Ministry declined to comment.

Finance Minister Fausto Herrera said in a Jan. 13 interview that the government obtained enough financing from China to avoid deeper budget cuts even if oil prices average less than $40 a barrel. Like his counterparts in Venezuela and Argentina, Correa traveled to China at the start of the year to ask for loans as the price of oil, which accounts for a quarter of Ecuador’s revenue, fell to a six-year low.

Ecuador, whose Oriente crude sells for $47.14 a barrel, announced on Jan. 5 it would cut 2015 spending by $1.42 billion, or almost 4 percent.

“It doesn’t sound like that’s going to be enough,” David Rees, an emerging-market economist at London-based Capital Economics, said by telephone. “Their financing needs will need to be much higher if they’re going to avoid really deep cuts in spending.”

‘Painful Contraction’

He predicts Correa, a 51-year-old former economics professor, will probably need to make deeper cuts later this year that will further crimp economic growth.

Ecuador’s $101 billion economy will stall this year, compared with an expansion of 3.5 percent in 2014, according to Capital Economics.

“With oil prices at $50 we’re probably heading into a recession at the very least or quite a painful contraction,” Michael Henderson, principal analyst at Verisk Maplecroft, said by telephone from Bath, England. “I don’t think that we’re seeing any kind of real signs of stresses yet, but things can change rather quickly.”