My Word Is My Bond

THE “D” WORD

Fast forward to Correa’s assumption of the presidency of Ecuador, as the global financial crisis ravaged oil exports in 2008, the state’s foreign debt rose from $1.17 billion, to over $14.25 billion. Correa’s special debt audit commission ultimately declared Ecuadorean debt illegitimate and resulting from the misdemeanours of previous administrations, and that repayments (which required the assigning of 50% of economic resources) were tantamount to neglecting the fundamental needs of education, health, housing, and infrastructure. Enter the “D” word, when at the end of 2008 he declared that Ecuador would not make a $3.2 billion payment on foreign bonds. Bondholders sold these instruments at rock bottom rates, and soon after, Ecuador bought 93% of its own debt at 35 cents on the dollar.

I’LL BUY THAT

Yet today, Ecuador has broadly regained investor confidence. As a result, President Correa walked Ecuador onto to the international stage by selling $2 billion of bonds in June 2014. The 10-year bonds were offered at a yield of 7.95%. The deal saw lower borrowing costs when compared with the $650 million of 10-year bonds priced to yield 10.75% in December 2005. Correa first estimated that Ecuador would gain $700 million in bonds, and asset managers and buyers seemed more than willing to welcome him back into the capital markets. This change reflects, too, government awareness of the need to diversify financing sources and loan requests, beyond Chinese funding of an estimated $12 billion since 2009. Ecuador only received 0.4% of total FDI in Latin America and the Caribbean at that time. If the Andean nation follows the same performance as other “frontier” markets, its bonds and stocks could log better performance than its peers on greater investor inflows. The transaction has attracted over 200 institutional investors and private banking from Europe, Asia, the US, and South America. And confirming a preference for realpolitik over rhetoric, Correa has since given the green light to annual IMF reviews of the economy.

WHAT TO BUY?

Revenue generated by the bond deal will partially fund Correa’s ambitious infrastructure and transportation projects. The National Investment Plan (PAI) of 2014 has determined that the government will make significant public investments worth $7.26 billion in the Ministry of Transport, the Ministry of Electricity and Renewable Energy, and the Ministry of Public Health and Education. In fact, the government’s investment goal by 2017 is $47.6 billion, while the 2014 budget alone calls for spending of $24.3 billion, including a deficit of $4.94 billion.

SEE-THROUGH ECONOMY

Ecuador’s return to the bond market has won the interest of investors, less wary of a repeat appearance of ideological rigor than aware that times change, along with circumstances. Meanwhile, Ecuador’s parallel return to transparency can only further attract alternative sources of financing to the local private sector, benefitting the nation overall in their wake. The World Bank predicts that Ecuador’s economy will expand by 4.3% in 2014, which would be among the best growth performances in Latin America.