New York, April 03, 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 Caa3 from Caa1
and changed the outlook to negative from stable.
Moody's decision to downgrade Ecuador's rating reflects the increased
and now very high probability of a restructuring, distressed exchange
or default on Ecuador's market debt as a result of the economic
and financial shock the country is experiencing due to the coronavirus
outbreak that has led to extremely tight financing conditions for Ecuador.
The EMBIG spread widened further in the last ten days and reached over
5,000 basis points, following the government's 23 March
decision to make use of the 30-day grace period for paying interest
owed on market debt in order to consider redirecting its resources towards
containing the health and economic shock of the pandemic[1].
Moody's expectation of losses to investors in a potential credit
event has risen significantly as a consequence of the mounting pressure
on government finances.
The negative outlook on the Caa3 rating reflects the strong downward risk
bias based on the possibility that losses could exceed levels consistent
with a Caa3 rating, which typically captures losses of up to 35%.
Given the scarce availability of funding alternatives for the sovereign
and the uncertainty surrounding the possibility of fresh International
Monetary Fund (IMF) financing, the authorities may seek to impose
heavier losses to alleviate their distressed liquidity position in order
to reallocate some of their limited resources to contain the impact of
Covid-19.
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 Caa2 from B3 and the foreign-currency deposit ceiling
changed to Ca from Caa2. 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 Caa3
On 6 February, Moody's downgraded Ecuador's long-term
issuer and senior unsecured ratings to reflect the sovereign's highly
constrained market access and the increasing risk to debt service payments,
particularly considering the challenging debt amortization schedule in
2022 through 2030. Since then, two key events have occurred.
First, the unprecedented deterioration in the global economic outlook
resulting from the rapid and widening spread of the coronavirus outbreak,
which Moody's considers a social factor under its ESG framework,
has compounded Ecuador's economic and funding challenges.
Combined with the sharp fall in world oil prices, this is putting
substantial pressure on government finances. As a result,
the government has petitioned the IMF for financial support through the
Rapid Financing Instrument (RFI) facility and is negotiating a successor
Extended Fund Facility (EFF) program to the current one.
Despite the possibility of fresh financing by the IMF, the deterioration
of Ecuador's economic and fiscal strength has been severe and its
financing needs are likely to increase substantially as a result of a
widening fiscal deficit that will require large amounts of new financing.
Moody's now forecasts that Ecuador's real GDP is likely to
contract 5.5% in 2020 as opposed to growing 0.2%
as projected previously. This will result in a wider deficit trajectory
for the central government relative to earlier forecasts. The central
government deficit is now expected to reach 5.1% of GDP
in 2020 rather than 3.3%, 3.9% in 2021
as opposed to 2.3%, and 2.9% in 2022
from 1.8% previously, which will compound the sovereign's
liquidity and funding challenges this year and over the medium-term.
Consequently, central government debt will likely peak at over 61%
of GDP in 2022-23 instead of 50.6% in 2021.
Moody's notes that the balance of risks is firmly tilted toward
the downside, and that the contraction in economic activity in 2020
could be deeper than currently projected, depending on the duration
of the outbreak and on global financial conditions.
Second and as a consequence, the government has now announced,
through the local press, that although it paid the $325 million
principal bond payment due on 24 March, it will make use of the
30-day grace period on $200 million worth of interest payments
due from 24 March through the end of the month in order to free up resources
to deal with the impact of the health crisis in the country.
Today's downgrade of the rating to Caa3 from Caa1 reflects Moody's
expectation of potentially material losses to investors as a consequence
of these events. Moody's downgrade is also informed by its
assessment of the country's weak institutional capacity that takes
into account a track record of defaults in the past, including the
most recent one in 2008. Moody's considers institutional
capacity to be a governance factor under its ESG framework.
RATIONALE FOR THE NEGATIVE OUTLOOK
However, at this early stage it is very unclear what the government
will seek in terms of debt alleviation in the event of a restructuring,
and will depend on the amount of financing it receives from the IMF and
other funding sources including multilateral creditors, relative
to the likely strong deterioration of the government's finances.
The negative outlook on the Caa3 rating reflects the strong downward risk
bias based on the possibility that losses could exceed levels consistent
with a Caa3 rating, which typically captures bondholder losses of
up to 35%. Given the scarce availability of funding alternatives
for the sovereign, the authorities may seek to impose heavier losses
to alleviate their distressed liquidity position in order to reallocate
some of their limited resources to contain the impact of Covid-19.
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. We also
regard the coronavirus outbreak, the consequences of which for Ecuador's
credit profile drive this rating action, to be a social risk under
our ESG framework, given the substantial implications for public
health and safety.
Governance considerations form an integral part of our credit analysis
for Ecuador and are material to the credit profile and to this rating
action. 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.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Evidence of a substantial amount of financing flows at highly affordable
rates that fully cover the sovereign's funding needs over the medium-term
such that the sovereign is able to avoid payments stress, would
decrease the likelihood of a credit event and losses to bondholders,
supporting a higher rating.
The rating could be downgraded if Moody's were to conclude that losses
to investors from a possible restructuring of government debt would not
be consistent with a Caa3 rating, based on a further worsening of
Ecuador's economic and fiscal prospects.
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: b3
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 31 March 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 materially decreased. The issuer's
institutions and governance strength, have materially decreased.
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 Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] Ministry of Finance official statement (email) 23-Mar-2020
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
