New York, November 23, 2016 -- Moody's Investors Service has today affirmed Ecuador's B3
issuer rating and maintained the stable outlook on the rating.
The key drivers of today's rating action are Moody's expectations
that:
1) The government's policy measures to adjust expenditures in response
to lower oil revenues will keep government debt ratios at moderate levels
2) The ongoing stabilization in broader macro-economic metrics
will be followed by a gradual growth recovery
The oil price shock has had a negative effect on Ecuador's growth
and government finances, and heightened liquidity pressures.
However, relative to Moody's rated universe, Ecuador's
economic strength is moderate and fiscal strength is high, and both
factors support its B3 rating. These credit strengths counterbalance
its very low institutional strength and a moderate susceptibility to event
risk, particularly liquidity risks.
The stable outlook incorporates an expectation of continued macro-economic
stabilization characterized by subdued GDP growth, a gradual decline
in fiscal deficits and steady balance of payments. On the other
hand, the government's tight liquidity position will likely
remain a constraint on the B3 rating.
The senior unsecured bond rating on the 2030 global bond was affirmed
at C, reflecting the unresolved bondholder claims on debt that has
been in default since 2008.
Ecuador's foreign currency ceilings remain unchanged at B2 for the
long-term bond ceiling and Caa1 for the long-term deposit
ceiling.
RATINGS RATIONALE
FIRST DRIVER -- EXPENDITURE ADJUSTMENT HAS LIMITED THE NEGATIVE FISCAL
IMPACT OF THE FALL IN GOVERNMENT REVENUES
Oil related revenues accounted for 30% of government revenues when
oil prices began to drop in the second half of 2014. After a steep
decline, oil related revenues now account for about 10% of
government revenues. In addition, the terms of trade shock
from falling oil prices had a negative impact on overall GDP growth,
leading to the government's non-oil revenues dropping as
well.
In order to offset the drop in overall revenues, authorities have
pursued a proactive strategy of expenditure cuts. Capital expenditures,
which historically have represented about 45% of total spending,
have been reduced by about 25% relative to their 2014 levels.
Consequently, the fiscal deficit declined to 3.8%
of GDP on an accrual basis in 2015, from 6.3% in 2014.
However, the reconstruction costs following the April 2016 earthquake,
coupled with costs associated with legal settlements of over $1
billion incurred during the first half of 2016 further weighed on the
government's finances. Nonetheless, we expect the 2016
deficit to remain at levels similar to 2015, although the government
is likely to maintain arrears to the private sector of about 1%-2%
of GDP.
We expect central government debt to climb to above 36% of GDP
in 2016 from 30.7% in 2015, and stabilize at between
40 and 45% of GDP over the next three years. Even with this
increase in debt levels, Ecuador's debt ratio will still compare
favorably to the median level for B rated sovereigns, which Moody's
forecasts will be about 55% of GDP in 2018.
With rising debt and subdued revenues, Ecuador's debt affordability
will decline, as the interest to revenue ratio will climb to 12%
in 2017, from 7% in 2014. This ratio will be slightly
above our 2017 forecast of a median of 10% for B-rated sovereigns.
Although Ecuador's fiscal fundamentals will still compare favorably
to many similarly rated peers, its sovereign credit profile remains
constrained by the challenges of meeting its now higher borrowing requirements.
These requirements have been met by various sources including a $2
billion (2% of GDP) 6 year global bond issued this year as well
as short-term financing from the central bank of over $4
billion. Looking ahead, the government's financing
needs keep it exposed to potential changes in the availability and cost
of funding, particularly in an uncertain international financial
environment.
SECOND DRIVER -- MACROECONOMIC INDICATORS ARE STABILIZING AFTER ABSORBING
LARGE TERMS OF TRADE SHOCK
Petroleum products accounted for over 50% of Ecuador's exports,
and 13% of GDP, so the balance of payments and growth impact
of the decline in oil prices was significant. Moreover, for
Ecuador's dollarized economy, the strengthening of the US
dollar dealt a further blow to competitiveness.
While the reduction in government spending mentioned above safeguarded
the government's fiscal profile, it further weighed on economic
activity. Private investment remained subdued due to the combined
impact of tighter liquidity conditions, the terms of trade shock
and uncertainty ahead of the 2017 general elections. Meanwhile,
weaker labor market conditions dampened private consumption. Consequently,
the economy entered into a recession in late 2015.
Moody's expects that GDP will contract 2.5% in 2016
but will likely resume an annual pace of expansion in 2017. Recent
GDP data reveal that the economy is emerging from recession, with
output expanding on a quarter-on-quarter basis in the April-June
period, breaking a four-quarter negative trend. Moody's
baseline expectation is that the recovery will be gradual, with
GDP growth rising towards 3% by the end of the decade, supported
by increased private investment and foreign direct investment, particularly
in the oil and mining sectors.
Ecuador's external position is also showing some improvement.
The country recorded a current account deficit of 2.1% of
GDP in 2015, after a 0.5% deficit in 2014.
To stem a further widening of the deficit amid continued liquidity pressures,
government imposed import tariffs in 2015, extending them this year
through mid-2017. Coupled with diminished demand caused
by the recession, import tariffs helped push the trade balance into
a surplus. Moody's now expects that the current account will
post a small surplus in 2016, the first one since 2010. This
improvement in the current account alleviates external liquidity pressures.
Liquidity has also improved in the banking system as the sharp drop in
deposits in 2015 was mostly reversed in 2016. However, there
has not been a rebound in credit growth, as banks' asset quality
has deteriorated and the economy has been in recession. This in
turn has weighed on banks' profitability.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectations that while an improvement
in Ecuador's external and fiscal accounts is likely over the rating
horizon, the sovereign's credit profile will remain constrained
by the financing risks the government faces.
That said, Moody's expects that government borrowing requirements
will decrease in coming years through a combination of lower capital expenditures,
following the completion of large-scale projects in the energy
sector in 2016, and other fiscal consolidation measures.
Additionally, given the government's debt maturity profile,
Moody's considers that rollover risk will remain low through 2019
as most of the government debt owed until then is composed of loans from
multilateral development banks, bilateral sources -- in particular
the Chinese government -- and domestic sources, mainly the
social security body.
WHAT COULD CHANGE THE RATING UP
There could be upward pressure on the rating if there was evidence of
stronger potential GDP growth driven by higher private investment and
financed by foreign direct investment inflows. Material and sustained
improvements in fiscal fundamentals, and a reduction in government
liquidity risks could also support upward rating momentum.
WHAT COULD CHANGE THE RATING DOWN
Downward pressure on the rating would develop if fiscal and/or balance-of-payments
finances were to materially deteriorate, heightening liquidity risks;
or if there was a return to political instability.
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 11,317 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.2% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.4%
(2015 Actual)
Gen. Gov. Financial Balance/GDP: -3.8%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.1% (2015 Actual)
(also known as External Balance)
External debt/GDP: 27.6% (2015 Actual)
Level of economic development: Very Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 21 November 2016, a rating committee was called to discuss the
rating of the Ecuador, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become increasingly susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2015. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides certain regulatory disclosures
in relation to the provisional rating assigned, and in relation
to a definitive rating that may be assigned subsequent to the final issuance
of the debt, in each case where the transaction structure and terms
have not changed prior to the assignment of the definitive rating in a
manner that would have affected the rating. For further information
please see the ratings tab on the issuer/entity page for the respective
issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Renzo Merino
Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
