Bond Is Back

Ecuador has two stock exchanges, namely the Bolsa de Valores de Quito (BVQ) and the Bolsa de Valores de Guayaquil (BVG), created in 1969. The BVQ ECU Index (Global) traces the trajectory of listed companies on both the Quito and Guayaquil stock exchanges. The Ecuindex is a key national indicator portraying the rise and fall of the national stock market overall. Liquidity remains an issue as many opaque family-owned businesses shun listing and the obligatory transparency that goes with it. Therefore, the exchange has yet to wrest capital from traditional investments such as real estate to become a more dynamic financial instrument. As of September 1, 2013, the Global Ecuindex had peaked at 1,100.52 on April 2013. Official data indicates that the market capitalization of listed companies in Ecuador had climbed from $690 million in 1992 to $6.10 billion by June 2012. Meanwhile, World Bank data puts Ecuador’s market capitalization of listed companies as a percentage of GDP at 7% for 2012, down from 7.5% in 2011 and 7.8% in 2010.

The 1993 Capital Markets Law sets the regulatory tone, availing stock market trading to banks and other firms, and fostering the development of mutual funds. Activity on the two stock exchanges is ostensibly in short-term commercial paper, bank obligations, and government debt, with less than 10% in equity trading. The main regulators of the securities market are the National Securities Council and the Superintendency of Companies, the former responsible for establishing the general policy of the stock market, and the latter tasked with the implementation and regulation of trading activities.

QUITO & GUAYAQUIL

Quito’s benchmark index is the Ecuindex, although two others are in play. The IVQ is a statistical measure of monetary value, while the IRRF is an index of bond performance. Currently, the BVQ has 44 (in 2012) listed companies and 35 brokers, all authorized by the Superintendency of Companies. The average capitalization of the exchange for 2012 was $1.167 billion. The total traded value for the year was $104 million, where the private sector trumped up $0.64 billion and the public sector $0.25 billion. As of Friday, October 3, 2014, the benchmark Global index had declined to 1193.81 points from 1194.86 in the final session of September of 2014.

The BVG, Guayaquil’s bourse, has over 45 listed companies serviced by 20 brokers. To render the two exchanges more appealing to international investors, as of January 2012, the BVQ and the BVG unified their trading systems with the Unique Interconnected Trading System (SIUB). The stock exchange, a tax-paying limited company, is also a beacon of transparency in the private sector.

INVESTMENT FUNDS

Investment funds must be registered with the Securities Market Registry, which is an organ subordinate to the Superintendency of Companies. The largest investor class is the government of Ecuador, acting through the Ecuadorean Social Security Institute (IESS), followed by banks and local equity funds. International equity funds are a rarity on the Ecuadorean stock exchanges.

BONDS

Ecuador is keen to re-enter the international bond market. The investment community appears warm toward a dollar-denominated bond rumored to offer rates of 7%-8%, with a 10-year maturity, geared at raising $700 million. According to The Economist, “Although such interest payments would be slightly higher than the rates China has demanded for its bilateral loans, some of which are tied to oil shipments, they are lower than the bonds that the country defaulted on.” In 2008 President Correa’s administration defaulted on $3.2 billion of sovereign bonds from ideological motive, since which time Quito has sourced Chinese credit to finance infrastructure projects. In a TBY interview, Fausto Herrera, Ecuador’s Minister of Finance dispelled any thought of a repeat performance, stating that, “the important thing to emphasize is that these bonds were not created by the Ecuadorean state. They were bonds that we had taken over as a result of the nationalization of private accounts. Private debts were taken over by the state and then restructured. Now, the new Ecuadorean constitution prohibits the nationalization of private debt, which removes the danger of this.”