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Rating Action:

Moody's changes Ecuador's rating outlook to negative from stable; affirms B3 ratings

12 Dec 2018

New York, December 12, 2018 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Ecuador's issuer rating to negative from stable and affirmed the long-term issuer and senior unsecured B3 ratings.

The decision to change the outlook to negative reflects the risk that Ecuador's government liquidity position may remain constrained ahead of debt repayments in the coming years given the challenging market conditions it faces. In Moody's view, Ecuador's market access will remain challenged due to a combination of internal and external factors that have contributed to negative investor sentiment, which has led to very high sovereign spreads, elements that will likely keep market borrowing costs high. Moody's notes that even though increased access to official (multilateral) financing would ease funding pressures, in the absence of more forceful policies that effectively address macroeconomic imbalances that built up over the past decade, a large official lending program would not be sufficient on its own to materially reduce the tight liquidity conditions.

Moody's decision to affirm the B3 ratings balances the sovereign's higher fiscal strength relative to similarly-rated peers, notwithstanding the sharp deterioration in Ecuador's government debt metrics over the last five years. The affirmation is also informed by weak but improving institutions and low economic growth as the economy transitions from a State-led economic model.

The senior unsecured bond rating on the 2030 global bond was affirmed at C, reflecting the small amount of remaining claims on principal amounts owed to bondholders that did not participate in the debt exchange of 2009, following the 2008 default.

Ecuador's long-term foreign-currency ceilings remain unchanged at B2 for bonds and Caa1 for bank deposits. The short-term foreign-currency ceilings remain NP.

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE OUTLOOK

CURRENT POLICY RESPONSE LIKELY TO BE INSUFFICIENT TO IMPROVE INVESTOR SENTIMENT AMID LARGE FISCAL IMBALANCES AND LOW FOREIGN EXCHANGE RESERVES

The authorities' gradualist approach toward macroeconomic adjustment will likely prove insufficient to improve investor sentiment and facilitate market access at more sustainable costs. The authorities have pursued a fiscal adjustment strategy that will reduce the government deficit to 4.0% of GDP this year from 5.9% in 2017, but consolidation efforts have been mostly focused on reductions in public investment. Other structural components of expenditure such as wages and transfers, which account for nearly 50% of total government spending, have been subject to only minimal reductions, while a rising interest burden is adding further rigidity to government spending.

The 2019 budget incorporates a gradual fiscal adjustment over the coming years, reducing the deficit to 3.2% of GDP next year. Looking ahead, prospects of weak growth and less favorable external conditions will weigh on government revenue, complicating deficit reduction efforts in the absence of additional spending adjustments.

Moody's expects the economy to remain weak over the coming years as it transitions from a model where public sector investment was the main growth driver -- increasingly dependent on external borrowing -- to one in which private investment and exports play a more prominent role. Continued reduction in public investment will weigh on growth while a transition toward a different economic model supported by policies put forward to incentivize investment in the country and increase trade openness will likely take years to materialize.

Additionally, Ecuador's external reserve position has become increasingly reliant on public external borrowing as the main source of hard currency into the country. In the context of a dollarized economy, higher exports and stronger flows of foreign direct investment would ease pressures on the fiscal and external reserve positions.

LIQUIDITY POSITION LIKELY TO REMAIN TIGHT GIVEN CHALLENGING MARKET ACCESS AHEAD OF A DEMANDING MATURITY SCHEDULE IN THE COMING YEARS

Moody's believes that Ecuador's access to private sources of external financing could remain constrained in the coming years, reflecting market concerns regarding the country's weak fundamentals. As a consequence, and despite reporting lower gross borrowing requirements than B-rated sovereigns (8% of GDP in 2019 versus a 'B' median of 11%), the country's sovereign spreads are higher than those of similarly-rated peers, a condition that has consistently led to high borrowing costs for the government. Sovereign spreads have remained above 700 basis points over the past few months, and are over 275 basis points higher than in January 2018 when the government issued a $3 billion ten-year bond with a coupon of 7.875%.

Relatively limited market funding has also made it more difficult for authorities to identify financing sources for 2019. Next year's budget incorporates an assumption of a market debt issuance of $1.75 billion. Moreover, funding sources for 56.5% ($4.6 billion) of its borrowing requirements next year have yet to be identified.

Government gross borrowing requirements will decline in 2019, but starting in 2020 the external debt maturity profile will turn more demanding. Debt repayments will rise from $4.0 billion in 2019 to an average of $4.6 billion in 2020-24. These amortizations include the maturities of global bonds in 2020 and 2022-24 on average worth $1.7 billion -- overall Ecuador faces global bond maturities of almost $15 billion (15% of GDP) during 2020-28.

If the government is unable to materially increase its market access, which would require improved investor sentiment, the government's debt repayment capacity will be restricted, introducing additional credit risk to the sovereign profile.

Given the short track record of orthodox macroeconomic policies, stronger support from official creditors may provide additional credibility to the authorities' adjustment program, which would contribute to improving investor sentiment. Should this allow Ecuador to access market funding at lower borrowing costs, liquidity risks that would compromise debt repayment capabilities over the coming years could materially decrease.

RATIONALE FOR THE RATING AFFIRMATION AT B3

HIGHER FISCAL STRENGTH RELATIVE TO B-RATED PEERS DESPITE WORSENING OF DEBT METRICS

Ecuador's debt metrics have deteriorated over the past five years following the oil price shock, which in turn affected economic growth and the fiscal accounts. Government debt will rise to 47% of GDP in 2019 from 22% in 2013. Under a more conservative deficit reduction path, Moody's forecasts that the debt ratio would stabilize by 2022 around 50% of GDP. At this level, Ecuador's debt ratio would still compare favorably to other B-rated peers, with a category median at 60% of GDP -- the median for B2- and B3-rated peers that have experienced shocks caused by volatile commodity prices or shifting external financial conditions is 70%.

However, Ecuador's debt affordability has worsened in recent years relative to peers. Due to a combination of lower revenue because of lower oil prices and weak economic activity weighing on tax income, as well as an accumulation of debt with higher costs, the government's ratio of interest payments-to-revenue rose to 14% in 2017 from 6% in 2013. Moody's forecasts this ratio will stabilize around 16% over the coming years, compared with a B-category median of less than 12% -- the median for B2- and B3-rated peers that have experienced similar shocks is 17%.

IMPROVING INSTITUTIONAL STRENGTH, SUPPORTING BETTER POLICYMAKING AND POTENTIAL FOR HIGHER PRIVATE INVESTMENT

Ecuador's institutional strength is weak on a global comparative basis. That said, under President Lenin Moreno the country's institutional framework has improved, especially in issues related to control of corruption and rule of law. The administration has put forward changes that have increased the independence of various entities charged with government oversight, including the comptroller general's office. Authorities have also taken steps to bolster transparency and accountability by presenting more comprehensive government debt statistics. Additionally, measures have been put in place to support a more favorable business environment, a development that over time should contribute to the transition away from a State-led economic model to one driven by private investment and exports.

Moody's considers that Ecuador's policymaking framework is shifting toward one associated with macroeconomic policies that, unlike those observed during the previous administration, are now directed toward addressing fiscal and external imbalances. However, given the gradual adjustment approach pursued by the authorities and given the relatively short track record, the government is still in the process of building up policy credibility.

WHAT COULD CHANGE THE RATING UP

The negative outlook signals that an upgrade is unlikely.

Moody's would consider changing the outlook to stable should the government secure sufficient funding to fully cover Ecuador's 2019 and 2020 borrowing needs, including the $1.5 billion global bond maturity, and there is evidence that sustained improvement in economic management is leading to a material reduction in both fiscal and external imbalances.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure on the rating would develop if Ecuador's ability to access market funding remains limited and alternate financing sources fail to materialize, compromising the government's external repayment capabilities and adding pressure on external reserves.

GDP per capita (PPP basis, US$): 11,507 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.4% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.2% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -5.9% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.4% (2017 Actual) (also known as External Balance)

External debt/GDP: 38.2% (2017 Actual)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 10 December 2018, 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 institutional strength/framework, have increased. The issuer's fiscal or financial strength, including its debt profile, has decreased. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. 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
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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