Finance

When Oil Else Fails

Capital Markets

Still very thin on equities, the two exchanges that comprise Ecuador's capital markets have yet to reach their target audience vis-í -vis listing; namely family-run enterprises shy of the attention.

In conversation with TBY, the President of the Quito Exchange, Bolsa de Valores de Quito (BVQ) Mónica Villagómez de Anderson asserted that; “…the Ecuadorian stock exchange market offers opportunities to both issuers and investors.” Moreover, improved security has brought, “…standards to international [while] current regulations offer more and more guarantees to all players.” Indeed, as Reuters confirms, a flexible new breed of long-term investor is bringing much-needed liquidity to emerging markets, including Peru in contrast to the previous aversion to volatile economies, or those that had a default in their past. Ecuador successfully convinced bond investors to lend $2 billion in 2014, having defaulted selectively on its debt back in 2008.

Nonetheless, liquidity is still wanting, as family-owned businesses tend to shun listing and the transparency that comes with the territory. As such, the capital markets can but dream of the interest shown in traditional investments such as real estate. The BVQ President continued that; “We see SMEs as a very important sector for BVQ—at the moment, there are 115 SMEs operating on the bourse.” Another potential source of future activity is identified by Jorge Calero Jácome, President of brokerage house Inmovalor Casa de Valores, who told TBY that: “The shift in the production matrix is in itself a great and attractive opportunity.” And keen to educate businesses; “to abandon old paradigms,” he believes that the time is ripe for local enterprises; “…to change the way they think and act in business, especially in pursuit of competitiveness.”

Ecuador has two stock exchanges, namely the BVQ and the Bolsa de Valores de Guayaquil (BVG), established 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 of overall national stock market performance.

INDICES AND REGULATION

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 essentially takes the form of short-term commercial paper, bank obligations, and government debt, while equity trading languishes at less than 10% of the total. The key regulators of the securities market are the National Securities Council and the Superintendency of Companies, the former mandates with establishing the general policy of the stock market, and the latter tasked with implementing and regulating trading activities.

On 29 December 2014, Ecuador brought into operation tax reform effective as of 1 January 2015, which had consequences for the capital markets and wider investment landscape. Accordingly, the general corporate income tax (CIT) rate remained at 22%, with the potential to be raised to 25%. CIT exemption was terminated for three transaction classes, namely for rights that allow exploration, exploitation and concession, the financial returns earned by companies on fixed term deposits, and more notably in our context, on the transaction of stocks and shares.

QUITO & GUAYAQUIL

Quito’s benchmark index is the Ecuindex, although two others exist. The IVQ is a statistical measure of monetary value, while the IRRF traces bond performance. The Ecuador Stock Market (ECU) stood at 1,226.57 on Friday August 14. It has averaged at 1,006.37 Index points from 2004 until 2015, with a historic peak of 1,255.51 in April 2015 and a record low of 53.38 in January 2005. Currently, the BVQ has over 40 listed companies authorized by the Superintendency of Companies. “In 2013…”, the BVQ President added; “…we closed on $3.7 billion in transactions.” 2014, however, saw a skyrocketing of transaction value to $7.5 billion. We expect a similar trend in terms of volume and amount of transactions in 2015.”

Guayaquil’s bourse, the BVG is serviced by around 20 brokers, and to present international investors with a more comprehensive offering, as of January 2012, the BVQ and the BVG unified their trading systems with the Unique Interconnected Trading System (SIUB).

INVESTMENT FUNDS

In Ecuador, investment funds are registered with the Securities Market Registry, subordinate to the Superintendency of Companies. The largest investor class is the government of Ecuador, acting through the Ecuadorean Social Security Institute (IESS), and is followed by banks and local equity funds, where growth of the latter group has been modest. International equity funds, too, have been rather silent on the Ecuadorean stock exchanges.

BONDS

Ecuador, shunned by international capital markets since giving an ideological slant to bailing on $3.2 billion of obligations back in 2008 and 2009, has since been forgiven, selling $2 billion in bonds in 2014, having attracted $5.1bn in demand. The government had been widening its search for diverse financing sources having borrowed over $11 billion from China since its 2008 default. It issued 10-year dollar-denominated securities with a high yield of 7.95%, in an offering managed by Credit Suisse Group AG and Citigroup Inc. In preparation for the bond, Ecuador was reported as ready to buy back roughly 80% of outstanding defaulted debt from the 2008 and 2009 period in a gesture of good will. Ecuador, one of one of eight nations with a dollarized economy, also received a $400 million loan from Goldman Sachs Group Inc. in 2014 in exchange for pledging part of its gold reserves as collateral. Ecuador is adamant that its reforms mean that the default could not see a repeat performance as the constitution prohibits the nationalization of private debt.

SLIPPING ON OIL

Crashing oil prices have rather taken the wind out of Ecuador’s sails, as OPEC’s smallest member saw a 44% year to January 2015 slump in oil export revenue. Needless to say, the government is determined to preserve a steady economic course regardless. Finance minister Fausto Herrera was quoted stating that growth rates have decelerated to the 2.5% to 3% range, with inflation forecasts upped to 5.5%, while exports are set at best to see a flat 2015 print from double digit growth over the past decade. And more worrying yet, the government’s budget drafted last year had oil pegged at $85.70/bbl, whereby it had planned the 2015 budget at $79.70, subsequently, reducing it realistically it to $40. Among government measures to mitigate the damage is a predictable $1.4 billion cut in public spending as well as import tariffs. It also resolved in March to place a $750 million five-year bond yielding 10.5%, not exactly an ideal figure, but indicative of commitment to sustainable economic performance in trying times.

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