CREDIT WHERE CREDIT’S DUE

With its back against the wall, Ecuador restructured its insurmountable debt, a move that conveniently coincided with a political win that has placed the Andean nation on a firmer international footing.

MIDDLE-INCOME ECUADOR has found itself swamped in long-term debt, notably to China, with pronounced consequences for its wider economy. Much of this dependence arose from left-leaning politicking by former President Correa, who was considered to have alienated Quito from Washington. In 2020, the recession proved sticking to repayment schedules a bridge too far, as the country restructured USD17.4 billion in debt, interpreted as a default.

Yet a year later, the Bloomberg Barclays index confirmed that Ecuador’s bonds, having scaled 28%, were yielding sweeter than any other country. Observers have attributed this to success on the vaccination front, in addition to rallying oil prices. More importantly perhaps, the public had spoken (marginally) at the ballot box. April’s inauguration of free market champion President Guillermo Lasso brought expectations of reform conducive to economic growth on a more confident international presence.

So significant was the political element that when Lasso won, the ensuing rally hiked Ecuador’s bonds due in 2030 up 35 cents on the dollar to 87 cents. Textbook economic reform has been swift, with customs duties reduced, import restrictions lifted, and the word put out that the oil industry needed to curry more favor from private investors. The current goal is to double oil production by 2025.

Central Bank of Ecuador (BCE) General Manager Guillermo Avellán Solines, in a TBY interview, noted how the incumbent administration is pursuing numerous objectives to escape the impacts of COVID-19 and credit alike. High among them is the equitable advancement of financial and fiscal sustainability. “Managing social policy programs with responsibility and transparency is essential, [and] the IMF program was a key aspect in recovering confidence and promoting transparency in financial management.”

POSTPONING THE PAIN

As these thing tend to follow, in August 2021 ratings agency Fitch Affirmed Ecuador’s country rating at B- with uutlook ‘Stable.’ The rating attests to the nation’s conflicting high per-capita income and social indicators contrasting limited economic growth prior to and since COVID-19, limited external liquidity, and an unwelcome debt repayment record. In 2020, the IMF forked out USD4 billion in emergency funding. And the ‘Stable’ component of the rating indicated Fitch’s belief that the government would bite the bullet and renegotiate an Extended Fund Facility (EFF) with the IMF.

ENTER THE FUND

Indeed, in late 2021 Ecuador reached a preliminary agreement with the IMF to ramp up a support plan for structural reform from USD4.2 billion to USD6.5 billion. The price to be paid by a nation for credit lines in terms of economic austerity and commitment of natural resources can be great. Ecuador is only too aware of this from its debt to Beijing of around USD5 billion tied to forking over crude oil and substantial infrastructure schemes.

It is noteworthy that this year Ecuador’s EFF funds taper off. The significance here is that EFFs—in contrast to regular IMF Stand-by Arrangement assistance—involve longer program engagement and repayment periods that support medium-term structural reforms. The current government is determined to take reforms to attract investment, fully join the Pacific Alliance, and improve social conditions that ultimately translate into votes. It follows then that Ecuador will once more turn to external markets for its financing needs.

AN INEVITABLE RESTRUCTURING

So, what was the restructuring about? Well, Ecuador—USD17.4 billion in the hole—eventually opted to pursue a restructuring facilitated by representative bondholder committees tasked with preventing minority resistance from killing deals agreed to by a qualified majority of bondholders.

In summer 2020, the then incumbent administration inked an agreement with its bondholders to restructure its USD17.4 billion in sovereign debt. The deal gave breathing space on USD10 billion over the subsequent four years, then a further UD6 billion between 2025 and 2030. Moreover, with bondholders to swallow a haircut of 9% on capital repayments, Ecuador would be saving around USD1.5 billion.

The restructure saw roughly 98.5% of the bond amount swapped for three new bonds amounting to USD15.56 billion. Meanwhile, interest rate fell from 9.2% to 5.3%, while the grace period was renegotiating from two to five years, with an extension to the repayment program from six to 12.5 years. With the deal, the nation was able to deliver UD15.5 billion of bonds to its creditors.

Ecuador saw record GDP contraction of almost 8% in 2020, and the IMF forecasts 2021 growth of 2.5%, half that of the region. Meanwhile, the nation has somewhat eased the pain of its debt burden at the ballot box and abroad.