LatinFinance - March/April 2016 - 55

ANDEAN
ECUADOR

Hampered by low oil prices, Ecuador is facing a budget shortfall this year and
may find it hard to make up the difference. By Lucien Chauvin

Reversal of fortunes

W

hen Ecuadorian President Rafael Correa began his final year in office in
February, he faced one of the toughest challenges since the start of his presidency in 2007. 
As the price of crude oil, Ecuador's top export, tumbled in 2015, the government has been
scrambling to make up for lost revenue. The economy grew less than 1%, well short of the
original 4% forecast. The government is maintaining its 1% growth forecast this year, but the
market consensus has Ecuador shrinking in line with the region. The International Monetary
Fund (IMF) projects GDP in Latin America and the Caribbean will decline 0.3% in 2016. 
Ecuador's budget for 2016 is just shy of $30 billion, about $4 billion lower than last year.
The government covered its needs in 2015 with financing from China and more than $1 billion
in loans from multilaterals. It also tapped the capital markets for the second consecutive year
with a $750 million 2020 bond carrying a 10.5% coupon. 
The Correa administration calculates a budget deficit of 2.4% of GDP and financing needs
of $6.6 billion this year. Filling the gap may be harder than expected if market conditions do
not improve and Correa sticks with his decision to shun the IMF. The market consensus is that
the Correa government will wait until the second quarter to review the 2016 budget, hoping
for a reversal in crude prices. A new round of belt-tightening would come if prices hover at
$30 a barrel.
"This year is much more complicated than 2015," says Alberto Acosta-Burneo, an
economist at think tank Grupo Spurrier in Guayaquil. "The government avoided an
adjustment last year because of access to external financing, but there are fewer options
in 2016."
Ecuador faces two fundamental problems. First, it based its 2016 budget calculations on
oil prices of $35 per barrel and second, it counted on China's continued largesse. China lent
Ecuador $11.5 billion between 2010 and 2015, including $5.3 billion pledged last year. The
Asian giant has only provided $970 million of that pledge to Ecuador so far this year.
"The price of oil continues to decline and China is dealing with its own problems, so at the
end of the day [China] may promise loans but they are not going to materialize," Santiago
Mosquera, head of research at the investment bank Analytica Investments in Quito says.  
Ecuador, the second smallest OPEC member by output, pumped an average of 544,000
barrels of crude oil per day in 2015, with state-run firms producing all but 120,000 barrels per
day. Ecuador is the sixth largest oil producer in Latin America. Revenue from oil in December
was $292 million, down 45% compared to the same month in 2014. 
A series of factors, from a mild winter in North America to the end of sanctions against
Iran, undercut oil prices at the start of the year, and the International Energy Agency expects
prices to remain low throughout 2016. Ecuador, which mostly sells Oriente crude as opposed
to the higher-quality Brent crude and  has high production costs at some of its oil fields, also
receives less money per barrel than the international benchmarks, further compounding
problems.

Wider impact
Slumping oil prices also lead to wider credit
spreads and increased country risk. The
low oil price was a critical consideration
in Standard & Poor's decision to lower
Ecuador's rating last year from B+ to B with
a positive outlook, says Joydeep Mukherji,
managing director at Standard & Poor's.
"The rating was lowered because they
use the US dollar and are dependent on oil.
When the price of oil collapses, you'd better
make an adjustment, and they really have
delayed on this," Mukherji says. 
Ecuador's $650 million bond payment
in December-the first time it has made a
payment in full and on time in its history
-and an agreement to pay $980 million
to settle a long-running legal battle with
Occidental Petroleum, were aimed at
boosting the country's prospects for
borrowing. The market has not reacted as
expected. 
Hernán Yellati, the head of research and
strategy at US investment bank BancTrust,
says Ecuador's image has improved, but
"eight defaults are not easily forgotten,
[which is the] reason why we maintain our
view that Ecuador yields will keep being
above the 10 percentage points threshold."
Yellati and Mukherji say that Ecuador has
the capacity to return to the bond market
but they agree that doing so under current
conditions will be expensive. "A bond right
now would be costly. It cannot be ruled out,
but I think they have made it clear that they
would go everywhere else before doing
another bond," Mukherji says. 
The reluctance to see a new a bond issue
not only comes from the government but
also from investors, according to Mosquera.
"I think investors would think twice when
looking at the yields," he says.
Mosquera says the government will have
to cut spending to reduce its fundraising
needs. "It is hard to see how they will get the
financing needed. They will have no option
but to cut spending." LF

March/April 2016 - L ATINFINA NCE.COM 55


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Table of Contents for the Digital Edition of LatinFinance - March/April 2016

Contents
LatinFinance - March/April 2016 - Cover1
LatinFinance - March/April 2016 - Cover2
LatinFinance - March/April 2016 - Contents
LatinFinance - March/April 2016 - 2
LatinFinance - March/April 2016 - 3
LatinFinance - March/April 2016 - 4
LatinFinance - March/April 2016 - 5
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