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Global Credit Research - 01 Feb 2011
New York, February 01, 2011 -- Moody's Investors Service has today upgraded the Ecuadorian government's
bond ratings to Caa2, the fourth lowest rating on Moody's
scale, from Caa3. The outlook is stable.
The main reasons for the rating decision are:
(1) Expectations that the government will continue to secure sufficient
external funds to finance its fiscal deficit; and
(2) Improved oil production prospects following the signing of new oil
contracts with foreign companies.
The upgrade also affects the country's ceiling for foreign currency (FC)
bonds, which has been moved up by two notches to B3 from Caa2,
and the FC bank deposit ceiling, which has been moved down to Caa3.
The outlook for all ratings is stable.
Country ceilings act as a cap on ratings that can be assigned to the foreign
and local currency obligations of entities domiciled in the country.
RATIONALE FOR THE UPGRADE TO Caa2
"Ecuador has been able to continue to fund wide fiscal deficits
despite fears that the country would face a financing shortfall following
its decision to default on Ecuador's Global 2012 and Global 2030
bonds at the end of 2008," said Patrick Esteruelas,
Moody's Vice President - Senior Analyst and the lead analyst for
Moody's anticipates that Ecuador should be able to secure sufficient
financial support from China, the Andean Development Corporation
(CAF) and the Inter-American Development Bank (IDB) and to access
local funding from the Ecuadorian Social Security Institute to cover most
of its funding needs. Additionally, efforts to reengage the
World Bank and IMF, coupled with plans to potentially tap international
capital markets for the first time since 2005, could provide additional
resources to fill the government's financing gap.
"The government's ability to sign new oil contracts after
almost two years of negotiations should also help correct the downward
oil output trend of the last three years, providing support to the
balance of payments and the fiscal accounts," Esteruelas added.
A majority of foreign oil companies agreed at the end of last year to
switch from production sharing agreements to service contracts,
pledging to increase investment and production after three years of cutback.
This commitment, if effective, could help increase oil production
after falling by about 5% since 2008. The oil sector accounts
for around 15% of Ecuador's GDP and over 50% of its
"The government has expressed a commitment to honor its $650
million worth of Global 2015 bonds, the only one of its bonds that
it did not declare illegitimate," said Esteruelas.
With annual coupon payments capped at $60 million until principal
is due in 2015, the corresponding debt service does not represent
a big burden on the state. "However, the country's
long history of defaults, including its decision to default on its
Global 2012 and Global 2030 bonds purely for ideological considerations
despite facing a low debt service burden, raise valid and persistent
concerns about Ecuador's willingness to pay."
"Fundamental concerns about the sustainability of the current policy
mix, which includes an aggressively expansionary fiscal policy,
heavy state intervention across the economy and the centralization of
powers in the hands of the president to the detriment of all other institutions,
continue to significantly constrain Ecuador's rating,"
CREDIT TRIGGERS FOR A POSSIBLE UPGRADE
Efforts to contain government expenditures, sustained oil production
increases and an improvement in the local business climate that can help
buttress domestic and foreign investment.
CREDIT TRIGGERS FOR A POSSIBLE DOWNGRADE
The anticipation of a default on the outstanding 2015 global bonds and/or
a disorderly exit from the current dollarization regime would place downward
pressure on the rating.
PREVIOUS RATING ACTION & METHODOLOGY
The last rating action on Ecuador was taken on September 24 2009 when
Moody's upgraded Ecuador's foreign currency bond ratings from Ca
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
MD-CCO Pub, Proj and Infra Fin
Sovereign Risk Group
Moody's Investors Service
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades Ecuador's sovereign rating to Caa2 from Caa3; outlook stable
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