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Rating Action:

Moody's downgrades Ecuador's rating to Caa1; changes outlook to stable

06 Feb 2020

New York, February 06, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded the long-term foreign-currency issuer and senior unsecured rating of the Government of Ecuador to Caa1 from B3 and changed the outlook to stable from negative.

The downgrade of Ecuador's rating reflects the following key rating drivers:

1) Market access for the sovereign is likely to remain constrained ahead of a challenging debt amortization schedule beginning in 2022.

2) The authorities are facing considerable resistance to the adoption of urgent reforms, which has led to policy uncertainty and hindered economic growth, in addition to adding further challenges to debt sustainability and market access.

The stable outlook on the Caa1 rating captures the authorities' intentions to maintain their efforts aimed at achieving further, gradual, fiscal consolidation and that risks to debt repayment remain contained in 2020-21 given an absence of large amounts of maturing market debt.

At the same time Moody's has affirmed the long-term foreign-currency senior unsecured rating for unrestructured debt at C, pertaining to the approximately $52 million (including accrued interest) of the 2030 global bonds that have been in default since 2008.

Ecuador's long-term foreign-currency bond ceiling was changed to B3 from B2 and the foreign-currency bank deposit ceiling changed to Caa2 from Caa1. The short-term foreign-currency bond ceiling and the short-term foreign-currency bank deposit ceilings remain unchanged at Not Prime (NP).

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Caa1

FIRST DRIVER: MARKET ACCESS FOR THE SOVEREIGN IS LIKELY TO REMAIN CONSTRAINED AHEAD OF A CHALLENGING DEBT AMORTIZATION SCHEDULE BEGINNING IN 2022

A persistently high cost of funding and the need to access markets to rollover maturing debt highlight risks to repayment capacity in 2022 given already low debt affordability metrics. High yields on the sovereign's debt issuances and a reliance on unconventional sources of finance as alternatives to the high market rates have been partly responsible for the sovereign's tight liquidity position prior to engaging the International Monetary Fund (IMF) and signing on to an Extended Fund Facility (EFF) program in early 2019. Although the program initially resulted in a more favorable liquidity situation, the sovereign's high cost of funding has not been fully addressed owing to delays in adopting reforms under the program. Moody's estimates that the central government's interest payment-to-revenue deteriorated to 17.3% in 2019 from 14.7% in 2018, higher than the median for 'B'-rated sovereigns at 10% and for 'Caa'-rated sovereigns at 11.2%, and will remain above peer medians through 2024.

The authorities were able to adopt tax reform in December 2019 that they expect will yield a net increase in revenues of 0.5% of GDP in 2020 and 0.5% of GDP in 2021, lower than the 0.7% in 2020 and 0.6% in 2021 under a prior proposal that was more in line with the initial IMF program targets. Additionally, no measures were enacted for 2019 to mitigate some of the loss in revenues from the ailing economy. Moody's estimates real GDP contracted 0.5% in in 2019. As a result, the loss of tax revenues in 2019 was larger than what the authorities and the IMF had forecast by 0.3% of GDP. Other expenditure restraint targets for 2019 were broadly met, but owing to the revenue loss, Moody's estimates that the central government fiscal deficit widened marginally to 3.8% of GDP from 3.6% in 2018.

IMF funding in 2020-21 and other efforts will provide support for meeting the sovereign's financing needs, but Ecuador faces considerable uncertainty beyond 2021 owing to the large amounts of market debt coming due beginning in 2022. Market sentiment has been prone to abrupt shifts as illustrated by the spike to over 1,300 basis points on Ecuador's EMBI spread in November, when the National Assembly voted to reject an urgent reform package. Although spread levels declined through the end of the year, they once again have risen to nearly 1,000 basis points. This highlights the fragility of the sovereign's access to markets despite a continued reliance on market funding in order to fulfill its financing needs, which Moody's estimates will remain between 7% and 8% of GDP for the central government through 2023, despite continued gradual fiscal consolidation efforts.

SECOND DRIVER: THE AUTHORITIES ARE FACING CONSIDERABLE RESISTANCE TO THE ADOPTION OF URGENT REFORMS, WHICH HAS LED TO POLICY UNCERTAINTY AND HINDERED ECONOMIC GROWTH, IN ADDITION TO ADDING FURTHER CHALLENGES TO DEBT SUSTAINABILITY AND MARKET ACCESS

The authorities have shown a willingness to adopt forceful adjustment measures, but the sociopolitical environment has been unsupportive for the adjustment that the government intended. The government announced a set of reform measures on 1 October 2019 expected to yield 2.1% of GDP in fiscal adjustment at the non-financial public sector level through 2021, including a removal of fuel subsidies which would be the key measure underpinning the fiscal adjustment, but the authorities were forced to backtrack due to strong opposition from the population. Compensatory measures, along with a set of other urgent reforms to meet IMF performance criteria, were rejected in a vote by the National Assembly. Although the tax reform was later approved by the National Assembly, the ensuing policy uncertainty along with the protests have adversely impacted economic activity, resulting in a contraction of real output in 2019. Moody's forecasts that economic growth will remain subdued at 0.2% in 2020, reflecting the negative impact of the recent political instability and policy uncertainty on investment in 2020, which will be unsupportive of domestic demand growth.

Sluggish economic activity will further hinder efforts by the authorities to narrow the central government deficit and reduce financing needs. The upcoming February 2021 presidential and legislative elections cast some uncertainty as to policy direction, as does the conclusion of the IMF program in December 2021, ahead of the challenging debt service schedule in 2022 and beyond.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the rating reflects Moody's view that upside and downside risks to the current assessment of Ecuador's credit profile remain balanced in the near term. Moody's believes that the authorities intend to maintain their efforts aimed at achieving further, gradual, fiscal consolidation and that risks to debt repayment remain contained in 2020-21 given an absence of large amounts of maturing market debt.

ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are not material to Ecuador's credit profile, and the country has not been identified as being one of the sovereigns materially exposed to physical climate change risks. However, Ecuador's economy, particularly primary sector activity, has been subject to droughts and floods from the El Niño weather shock at irregular intervals (10 or more years).

Social considerations have played a role in increasing political risk in the country. As illustrated recently in October 2019, violent protests broke out against government measures to eliminate fuel subsidies, forcing the government to backtrack on the subsidy removal and to devise complimentary measures in support of fiscal consolidation under an IMF program. The risk of social unrest constrains the sovereign's ability to adopt policies that address long-standing distortions that inhibit economic growth in the country.

Governance considerations form an integral part of our credit analysis for Ecuador and are material to the credit profile. Long-standing concerns about public financial and fiscal management, willingness to repay (which in the past had a hand in defaults), and the overall lack of clarity and predictability of policymaking have constrained Ecuador's credit profile.

WHAT COULD CHANGE THE RATING UP

Evidence of a sustained improvement in economic management leading to a material reduction in both fiscal and external imbalances would contribute to improving creditworthiness. Additionally, substantial progress on consolidating the central government deficit to reduce financing needs and improve access to market funding at rates that support the sustainability of public finances could lead to a positive rating action.

WHAT COULD CHANGE THE RATING DOWN

Further tightening of liquidity conditions, due to the lack of credible fiscal policies or other factors outside the authorities' control, would likely lead to a downgrade by jeopardizing the sovereign's ability to access market funding at affordable rates ahead of the challenging debt maturity profile beginning in 2022.

GDP per capita (PPP basis, US$): 11,760 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.3% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.3% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -3.6% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.4% (2018 Actual) (also known as External Balance)

External debt/GDP: 40.9% (2018 Actual)

Economic resiliency: ba3

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

On 31 January 2020, 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 not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Jaime Reusche
VP - Senior Credit Officer
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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