NEW YORK, Aug 13 (IFR) - Weaker oil prices, uncertainty about China’s FX policies and a downgrade in Ecuador were all weighing on a LatAm market still suffering from light summer volumes on Thursday.
Prices on Ecuador’s 10.5% 2020s continued to head south following S&P’s decision on Wednesday to cut its long-term rating to B from B+.
The bond was being quoted at 89.00 on Thursday, marking a 19% drop in price since it reached a high of around 110.45 in mid May following a generously priced US$750m reopening.
As justification for the downgrade, S&P cited the government’s limited ability to push through fiscal measures at a time when falling oil prices and spending cuts are causing social tensions.
Oil sales represent some 50% of the country’s exports and this year’s dramatic decline in crude prices has left the government struggling to raise revenues.
This week’s drop in oil prices following the devaluation in China, which has supplied a good chunk of funding to Ecuador in recent years, only applied further pressure to the Andean nation’s bond prices.
The country’s financing requirements for 2015 stand at US$10.5bn, or 10% of GDP, with the government having already raised some US$6.3bn as of June, said S&P.
Ecuador garnered US$1.5bn of that amount through two bond sales this year, but at higher than expected cost as international investors pushed back on a credit hit by sinking oil prices.
“The market’s concern about Ecuador is a lack of financing options,” said Kevin Daly, a portfolio manager on Aberdeen’s EM fixed-income team.
“They brought the 2020 at 10.5% and they are now trading at over 13%. That sums up the plight they are in right now.”
S&P said that this year’s financing needs will be covered by multilateral and other official sources, as well Chinese funding, noting that next year borrowing requirements will drop to around US$6bn.
Other investors are taking a more sanguine view of Ecuador’s prospects on the expectations that the country can cover upcoming funding needs through the local markets and development banks.
“We think Ecuador is being unduly punished,” said Bryan Carter, head of EM debt at Acadian Asset Management. “Granted, it is an oil exporting country and that impacts the economy, but even accounting for that, the bonds look cheap.”
Elsewhere markets were largely weaker as investors took a hands off approach to a region seen vulnerable to China’s decision this week to devalue its currency.
“People have been trying to figure out this move in China and what this means,” said Jorge Piedrahita, CEO at broker Torino Capital. “They have been reluctant to put risk on.” (Reporting By Paul Kilby)