When Rafael Correa, a socialist who calls globalization “cruel and inhuman,” took office as Ecuador’s president in January 2007, investors immediately grew panicky about the country’s $10 billion debt. After all, Correa had repeatedly threatened to default on some of it, a potent warning considering Ecuador defaulted as recently as 1999.
But lately investor attitudes have calmed, thanks to the market-friendly stance of Finance Minister Fausto Ortiz. The minister used a $500 million loan from the Andean Development Corp. to reschedule principal payments due on Ecuador’s debt in 2008 while maintaining interest payments.
In an interview with Institutional Investor, Ortiz explains that reducing debt-servicing costs is his priority. “In case of an external shock, our job is to not have to choose between a default and a social program,” he says in a telephone interview from Quito.
Ortiz’s pragmatic stance has boosted Ecuador’s standing in the markets. In November, Standard & Poor’s upgraded the country’s long-term debt by two notches, to single-B-minus, citing strong liquidity as a result of high oil prices, an unblemished record of interest payments and “proactive debt management.” Spreads on Ecuadorean debt subsequently declined to less than 600 basis points over U.S. Treasuries in December from a peak of more than 1,000 basis points at the start of the year.
Ortiz’s intention to press for further reductions in debt-servicing costs this year has fueled speculation that he will seek to swap some of the country’s outstanding debt for cheaper obligations. The minister tells II only that he expects to present plans for reducing debt costs in the middle of 2008.
“If Ecuador wants to do something market-friendly, they can swap without problems,” says Alberto Bernal, an emerging-markets fixed-income analyst at Bear, Stearns & Co. in New York. Investors are more concerned about a government-backed committee that is auditing the debt to determine its legitimacy, he adds. Correa has threatened to repudiate illegitimate debt.
By July the National Assembly, which is dominated by a pro-Correa majority whose leaders advocate setting a ceiling on debt payments, is due to write a new constitution that will be put to a vote in a plebiscite by year-end.
Ortiz plays down concerns about a drastic change in the constitution and predicts that the Assembly “will give a wide degree of freedom to investment.”
Notwithstanding his reassurances, many overseas analysts fear that the business climate will turn unfriendly. Bernal predicts that the Assembly “will implement very short-sighted policies,” including interest rate caps on bank loans and harsher terms for investment in the energy sector.
In October a Correa decree changed the rules for foreign oil operators in Ecuador, upping the government take on so-called windfall profits to 99 percent from 50 percent. The move is expected to generate an additional $300 million a year in government revenues.
Ortiz dismisses concerns about a possible negative fall-out from the measure. “Investment in petroleum won’t be affected,” he asserts, citing Correa’s late-November visits to China and Indonesia, whose state oil companies are set to launch explorations.
Getting the broader economy back on track remains a challenge. Ortiz predicts growth will have slowed to less than 3 percent in 2007 from 3.9 percent in 2006. He aims to jump-start growth by increasing public investment in oil and hydroelectric projects. He hopes the spending will boost the state oil company, PetroEcuador, whose production fell by 11 percent in 2006.
