The fast view
- Ecuador’s bond market came under intense pressure in March but has steadily recovered, thanks to constructive progress towards restructuring its debt.
- With its impressive restructuring deal settled and the newly-issued bonds now trading, the country is able to plan for its future.
- The country has also secured a frontloaded US$6.5 billion IMF support package, which will see it receive funds from October, after committing to important reforms that hold the key to unlocking Ecuador’s full potential.
- While political risk remains with next year’s presidential elections approaching, we believe there is a good likelihood of a market-friendly outcome.
- We continue to hold a positive view on the country’s bonds, which offer investors double-digit yields.
One of the most over-sold markets at the height of the first-quarter turmoil
, Ecuador’s bond market has since staged an impressive recovery, capping a volatile year to date.
By working constructively with multi-lateral entities – including the IMF – to seek a sustainable path for its debt while showing an ongoing commitment to reforming its economy, Ecuador soon returned to favour among the investment community. In recent days, these efforts have paid off, with Ecuador reaching several important milestones in what may well be viewed as a turning point for the economy.
First and foremost, having reached an agreement with 98.5% of bondholders, Ecuador has exchanged its old debt for new bonds in a restructuring deal. This alone is positive news. Add to that the impressive pace and scope of the restructuring and it’s hard not to be optimistic.
The deal will save Ecuador almost US$10billion over next four years, which means the risk of external debt being politicised in the run up to next year’s presidential election is now much lower. Furthermore, the completion of the restructuring will allow rating agencies to move Ecuador away from the Selective Default (SD) category; S&P has already reinstated its B- rating.
The country has also reached an agreement with IMF staff regarding a US$6.5 billion 27-month program under the IMF’s Extended Fund Facility. This agreement is significant for several reasons. First, the size is equivalent to 650% of Ecuador’s quota (the tool used by the IMF to allocate resources among countries); by employing its exceptional access lending framework for Ecuador the IMF has proven its commitment to the country. Second, the total amount will be disbursed in frontloaded fashion, with US$4 billion paid in 2020, and the first tranche arriving in October. This will help clear the country’s arrears, improve domestic liquidity and plug funding gaps for this year and next. Third, its side of the bargain sees Ecuador committing to several reforms, including comprehensive tax reforms, which should help reduce vulnerability to future shocks. We will get clarity on the conditions that the IMF will attach to the new program in the next IMF staff review in October, however we expect these to be pitched such that any future government will find them acceptable.
While forthcoming elections remain a risk, we expect centre-right candidates to consolidate behind a single ticket led by Guillermo Lasso, who narrowly lost to current President Moreno in previous elections. Several well-known politicians, including Otto Sonnenholzner (former VP) and Jaime Nebot (former mayor of Guayaquil), have recently bowed out of election race, with reports suggesting that parties are looking to work together to block the route for Moreno’s Correismo party to return.
We remain constructive on Ecuador’s bonds, which still offer yields around 10%, as the country has a large amount of external support, repayment risk is low, and there are increasing signs of the economy moving past its weakest point as we head into elections, all of which should support bond prices.
It has been a rocky road for investors in Ecuadorian bonds, but as the country embraces the future this is a tale of patience paying off for those with conviction.
Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.