Rafael Correa swept back to power in Ecuador’s presidential election in February and is set to evaluate re-entry to the international capital markets as a means to generate much-needed investment capital.
Ecuador is heavily reliant on earnings from oil, which accounts for 40% of government revenues, but lack of investment in the sector has led to stagnating production. At the same time, large increases in government spending and failure to draw in foreign direct investment have led to increasing dependence on oil revenues. According to Capital Economics, if global oil prices were to fall below $90 a barrel, Ecuador’s current account deficit would widen to over 5% of GDP.
“A general failure to accumulate savings during the recent run-up in oil prices means that financing a shortfall may prove difficult,” Capital Economics said in a briefing note. “In recent years Ecuador has relied on Chinese loans, often in the form of forward sale of oil, to plug twin deficits on the current account and budget.”
Recent international transactions from Bolivia and Paraguay have led to speculation that Correa will also attempt to re-engage with international investors. However, it might be that even in this yield-hungry environment Ecuador will find it difficult to sell a bond at yields that make sense. State officials are believed to have had talks with Citi and JPMorgan about a possible sale of bonds from the financing arm of the state-run pension fund Biess, although requests for comment were declined.
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