Ecuador is a bright light, outshining Venezuela

Flying high above Quito: Ecuador’s on the up, but its politicians are causing a risky amount of turbulence

In Q3 2017, Ecuador’s risk score increased again, putting it among the top-10 countries with the most improved performance in Euromoney’s survey this year.

Gaining 1.7 points since 2016, and 7.2 in all since 2010, the borrower is now on a total score of 35.2 points – from a maximum 100 – and about to make the leap from ECR’s tier five, containing the highest default risks, to tier four, equivalent to a B- to BB+ credit rating.

Clearly, Ecuador is not a particularly safe option. It has low scores for almost all political, economic and structural risk indicators, and there is a fight for control taking place within the ruling Country Alliance Party, which will almost certainly cause a split and complicate policymaking.

Yet it is one of several countries in the region beginning to look more attractive to portfolio investors, alongside safer bets Colombia and Uruguay, and recovering Argentina – all improving in Euromoney’s survey – and it remains a stand-out compared with higher-risk Venezuela on the brink of default with far fewer macro-fiscal problems:

The political environment in and around the Quito-based National Assembly is still concerning, however, with splits emerging in the ruling party between supporters of the current president Lenin Moreno and his predecessor Rafael Correa.

Moreno, who was elected in May and has chosen to depart from the party’s leftist direction, was removed as head of the ruling party at the end of October, but remains in office as head of state, in charge of government, while Correa’s supporters allied to Venezuela defend the party’s leftist leanings.

Encouragingly, Moreno has the support of the general population, with 77% approval ratings, and is attempting to restructure the national debt, root out corruption and instigate political reform.

This involves putting a raft of proposals to a referendum next year that include reinstating presidential term limits, and will reinforce the impression of better governance and transparency – although Moreno will now require opposition backing.

Promoting better relations with creditors and foreign trade partners, including the US, is also high on the agenda, while distancing Ecuador from the Venezuelan regime.

Consequently, risk experts have been consistently upgrading their assessments of key indicators, and capital access has improved.

Urgency

One contributor to the survey mentioned in confidence the political risks are concerning with Moreno removed as head of the party. There is also urgency for fiscal adjustments with the deficit pushing public debt up closer to 40% of GDP.

However, the economy is improving at a faster pace than the IMF expected, after falling in recent years due to the oil shock.

With private consumption fuelled by credit growth, and oil production rising, GDP growth accelerated to 3.3% year on year in Q2 2017, from 2.2% in Q1, and its strongest pace since Q1 2015.

The unemployment rate – 5.8% in Q2 2017 – is the lowest in the region, and inflation has fallen to virtually zero in recent months.

The renegotiation of loans-for-oil deals between the state-owned national oil company, EP Petroecuador, and Chinese firms could result in less oil shipped to China and an improvement to the debt metrics if all goes well, but will be tricky.

Regardless, Moreno has announced comprehensive business-friendly economic plans, including tax, labour and public spending reforms to firm up the debt metrics.

There are high stakes involved, but Moreno knows the country must change, and so far, as Euromoney’s crowd-sourcing survey demonstrates, there is still confidence in the directional change, even if it falls short of expectations.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.