Ecuador faces challenges to develop bond market
January 9, 2019 |
Government gets input from the US Treasury on how to create a liquid market for corporate issuers
Ecuador's finance ministry faces big challenges to develop the local bond market for corporate issuers in the near term, despite help from the United States, LatinFinance has heard.
"The government is looking to create a robust and liquid domestic debt market and is receiving assistance from the US Treasury," said Ramiro Crespo, founder of the Quito-based brokerage firm Analytica Investments.
According to Crespo, the government's program could provide a better foundation for corporate bond issues in Ecuador, while lowering the costs of capital and establishing a performance curve for local notes.
The government manages its local notes through the Euroclear system and follows global standards. Corporate issuers in Ecuador, however, do not, and more than 100 local bonds have come to market with unreliable clearance systems, low standards and no credit ratings, Crespo said.
"We have a high country risk and a lack of standards," he said.
Brazil, Colombia and Peru have stronger capital markets, but the use of the US dollar as Ecuador's official currency could bring in international investors, Crespo said.
An investor in New York said the government is taking the right steps to develop the economy but added it has long way to go with the bond market.
"Ecuadorean companies are small and finance themselves through the IFC or the IDB at very low rates. If a company like [the supermarket operator] Corporación Favorita wants to go to market, it has to pay more than the sovereign rate," he said.
According to the investor, Ecuador pays more than 10% on its 2025 bonds, which means local firms have to offer yields of 11% to 12% to attract buyers. "Why do that when you can get a loan at 8% loan from the IFC or the IDB?" he asks.