02 June 2015

JPMorgan Says Not to Worry as Ecuador Promotes Digital Currency

By Nathan Gill
(Bloomberg) -- Ecuador’s home-grown digital currency is nothing to fear. At least that’s the conclusion of analysts from JPMorgan Chase & Co. to Credit Suisse Group AG and Nomura Securities International Inc.

The country’s bonds fell last week after the government ordered banks to start accepting a new electronic tender it created last year. Previously, officials had said the system would be voluntary. Investors are concerned that President Rafael Correa plans to use the dinero electronico to wean the nation off its official currency, the U.S. dollar, and eventually start creating virtual money to plug a budget gap.

The bond selloff, and the concerns, were overblown, the analysts say. Javier Kulesz, a managing director at Nomura, said he isn’t worried about a sudden end of dollarization because the government has said it will keep liquid reserves to back the digital currency. Oil prices will be more important in determining how the country’s dollar bonds perform than the virtual tender, according to Acadian Asset Management LLC portfolio manager Holger Siebrecht.

“As far as I’m concerned, this is noise,” said Boston-based Siebrecht, who helps manage about $350 million of emerging market debt, including Ecuadorean bonds. “We see these things from time to time in emerging markets, that a news item comes across and there’s some short-term, knee-jerk reaction.”

Always Voluntary

The extra yield investors demand to own Ecuadorean bonds instead of Treasuries, a measure of risk perception in credit markets, rose the most in two months last week, jumping 0.52 percentage point to 7.35 points, data compiled by JPMorgan show. The so-called spread trails only Ukraine, Venezuela, Belarus and Belize among developing countries worldwide.

The new measures require banks to offer services tied to the electronic coin, giving lenders with assets greater than $1 billion 120 days to fulfill the requirement, while smaller banks will get as long as a year, according to a resolution published in the nation’s official register May 25.

The rule change will give users more opportunities to use the digital currency, which will continue to be completely voluntary for private citizens, the central bank’s press office said in response to questions from Bloomberg.

“What changes is that those citizens who voluntarily have decided to use the electronic money will be able to do it at all of the banks in the financial system,” the monetary authority said.

Oil Prices

Concern about the OPEC nation’s economy has grown over the last year as prices for its crude oil, which made up about half of Ecuador’s 2014 export revenue, slumped to an almost six-year low in January. While Ecuador’s Oriente oil prices have climbed 49 percent to $57.00 a barrel since then, the government is still on track to post the biggest budget deficit on record.

So investors in Ecuador should be focused on the outlook for crude and the government’s ability to fund itself, not the use of an e-currency, Nomura’s Kulesz said in a note May 28.

“There are lots of things to worry about in Ecuador, but this is not it,” Kulesz wrote.
Still, last week’s banking rules revived questions about how the government plans to use the new currency in the future and officials’ long-term support of dollarization, according to Sarah Glendon, an economist at Gramercy Funds Management LLC.

‘Contingency Plan’

“I have never gotten a logical explanation from the government as to why the central bank is the intermediary for this e-money, whereas in other countries, it is commercial banks,” Glendon said from Greenwich, Connecticut. “I view the e-money as a contingency plan that is setting the stage for eventual de-dollarization. Not immediate, but eventual.”

Correa, who’s likened dollarization to boxing with one hand, is a vocal critic of Ecuador’s use of the greenback. Still, he and his cabinet members have repeatedly said they have no plans to abandon the dollar.

“We think the authorities are strongly committed to the politically popular dollarization regime, at least through the 2017 election cycle,” Benjamin Ramsey, an economist at JPMorgan in New York, said in a May 29 research note.

Juan Lorenzo Maldonado, an economist at Credit Suisse in New York, said in a note to clients it doesn’t seem there are immediate plans by Ecuador to use the electronic currency to make payments to suppliers or employees.

“Officials completely discarded any intentions of doing so, and we take their word at face value,” he said.