NEW YORK, Aug 20 (IFR) - Ecuador bond prices fell on Thursday after US crude hit a six-year low on Thursday, exacerbating fears about the oil exporter’s ability to pay its debt.
With oil accounting for about 52% of its exports, the Andean nation is particularly vulnerable to the slump in commodities that is pressuring bond prices elsewhere in emerging markets.
Ecuador now faces some tough choices that may impact investors who were persuaded just a year ago to buy the country’s first bond issue in nearly a decade from the same government that defaulted in 2008.
Ecuadorian bond prices have essentially moved in line with crude, steadily declining since May. But they took another leg down this week as investors absorbed the tough challenges ahead for the country.
The sovereign’s 2020s were trading at 76.50 on Thursday, down from the 77.15 seen at the beginning of the week, while the 2020s have tumbled to 85.30 versus 88.30 seen on Monday.
In a report entitled “This time is worse,” Bank of America Merrill Lynch analyst warned that Ecuador faced painful adjustments that may threaten a dollarized economy reliant on oil exports.
”We expect the government to avoid abrupt spending cuts by issuing more debt and tapping assets, rather than defaulting,’ the bank said.
Raising funding, however, may prove difficult. 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 a higher-than-expected cost as international investors pushed back on a credit hit by sinking oil prices.
“Investors have focused for a long time on Ecuador’s willingness to pay given past defaults, but I think now it is more about ability to pay,” said Sarah Glendon, head of sovereign research at Gramercy, whose base case has the government paying the maturity on the 2015 in December.
Glendon believes that the government will likely make that payment with cash on hand rather than roll it over, given that tapping the markets is likely to extract an extremely high cost.
“They have already borrowed so much from the domestic social security agency and domestic banks, and I don’t see them being able to increase borrowing from CAF and the IADB.” (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)