Fitch Affirms Ecuador's FC IDR at 'B-'; Outlook Revised to Positive
Fitch Ratings has affirmed Ecuador's Long-term foreign currency Issuer Default Rating (IDR) at 'B-', its Short Term IDR at 'B', and the Country Ceiling at 'B-'. The Rating Outlook is revised to Positive from Stable.
The Outlook revision to Positive reflects Ecuador's improved growth performance as well as manageable financing needs in the context of high international oil prices.
Ecuador's ratings currently balance comparatively stronger fiscal and external solvency indicators against the sovereign's weak debt service record, limited sources of financing and high commodity dependence. In addition, a high level of state intervention weakens the business environment and undermines economic policy predictability.
Ecuador had a strong economic performance in 2011 with GDP expanding 8.0%. While higher public investment could increase the country's growth potential through improved infrastructure and reduced energy costs, the economy's medium-term performance will also depend on the government's capacity to transition from a significant oil-fuelled fiscal stimulus to a more sustainable mix including increased private sector investment. In this context, the government is currently attempting to attract greater private investment in the oil sector.
Higher than budgeted oil prices have allowed the government to keep financing needs under control. The non-financial public sector (NFPS) deficit, estimated at 2% of GDP in 2012, could remain lower than 'B' rated peers in the event that oil prices remain close to current levels. Chinese loans to the Ecuadoran government have facilitated the government's capacity to boost capital spending. As capital expenditure partly explains the significant fiscal expansion in recent years, the government could potentially adjust its investment plans and reduce its financing needs in the event of a revenue shock.
Nevertheless, Ecuador has high commodity dependence and limited financing sources. NFPS oil-related revenues have increased to 19.3% of GDP (41.4% of total revenues) in 2011, and oil exports represented 58% of total exports (18% of GDP). The current account deficit, at 0.3% of GDP in 2011, is expected to deteriorate and underlines the importance of securing greater external financing to prevent a faster deceleration of the economy in the context of dollarization.
Ecuador continues to have limited access to financing. While China has provided substantial financing for infrastructure projects and budget support in recent years, financing sources continue to be limited as a result of Ecuador's relatively shallow domestic debt market, and its limited access to non-bilateral foreign funding.
Ecuador's government debt, at 22% of GDP in 2011, remains lower than 'B' rated peers in spite of significant bilateral borrowing from China. Nevertheless, this needs to be balanced against the demonstrated weak willingness to repay debt, which weighs on Ecuador's credit profile and highlights the country's low debt tolerance. In 2008/09 the sovereign defaulted by conducting a coercive debt exchange despite existing capacity to pay. Fitch notes that Ecuador's commitment to continue servicing debt has not yet been tested under less favorable external and commodity price conditions.
Greater confidence as to the sustainability of future economic growth, evidence of continued government willingness to service debt and access to international finance, and favorable investment dynamics in commodity sectors would be positive for Ecuador's ratings. Sustained deterioration in the sovereign's fiscal and external credit metrics, reemergence of financing constraints and signs of erosion in the sovereign's willingness to service debt could negatively impact creditworthiness.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Sovereign Rating Methodology' (Aug. 13, 2012).
Applicable Criteria and Related Research:
Sovereign Rating Methodology
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