EXCLUSIVE: Ecuador shoring up credit lines, coping with oil price drop - Deputy FinMin
March 16, 2020 |
Oil price drop will not stop March debt payment, negotiating with Chinese banks for credit line
Ecuador says it will have no troubles making a final payment on a 2020 sovereign bond due near the end of March despite the rout in the price of oil which serves as its main source of revenue, the South American nation’s deputy finance minister told LatinFinance in an exclusive interview late on Friday.
Additional measures to shore up its financial situation, Esteban Ferro said in a telephone interview, include adjusting its lending program with the World Bank, working with Chinese banks for a $2 billion line of credit, and talks with investment bank Goldman Sachs to retool the terms on a repurchase agreement due in September.
Amidst the global financial market carnage, fiscally challenged nations such as Ecuador are seen as vulnerable to sell-offs, economic decline and seizing up of credit lines. The sharp drop in the prices of Ecuador’s sovereign bonds in the last week mirrored the plummeting prices for oil, which fell nearly 25% on March 9 only to stabilize at levels last seen in February 2016. The price on West Texas Intermediate crude oil trading on NYMEX is off nearly 52% from its recent peak on January 8.
“The market is unnecessarily nervous about Ecuador,” Ferro said adding: “In the next few weeks, we will have very good news for the market."
Oil provides a third of Ecuador’s fiscal revenue, according to the World Bank and half of its exports. Given it has adopted the US dollar as its currency, the general rally in the greenback over the last two years, has only meant Ecuador’s exports outside of the oil and gas sector have become more expensive.
MAKING ITS PAYMENTS
Ecuador is due to pay $325 million by March 24th for its maturing 2020 sovereign bonds.
“Our liquidity situation is complicated, but our priority is to pay our obligations and the Ministry of Economics is taking all the actions to achieve this,” said Ferro, adding that the government is expecting disbursements from the International Monetary Fund to come very soon.
Investors also express optimism about the 2020 amortization and about this year in general.
“Oil has hit the country hard, but IMF and World Bank disbursements seem to be coming, and the price of the 2020 bonds is reflecting this,” said Francisco Ghersi, managing director of Knossos Asset Management in Madrid.
Ecuador's 2020 bond, carrying a 10.5% coupon, traded at a price of 93.50, according to MarketAxess data via Refinitiv on Friday. The central government, Ferro said, is due to pay out $3.2 billion in debt amortizations this year.
However, even as there was optimism for the March payment, looking further out on Ecuador’s benchmark yield curve, the numbers tell a different story. The price of its 9.5% March 2030 bond has tanked to just under 38 cents on the dollar, putting the yield up to 28.45 percent. It had been trading just under par at the start of 2020, Refinitiv data showed.
Despite the 2020 bond’s move higher, there is also concern over the upcoming February 7, 2021 elections said one Boston-based veteran emerging market investor who requested anonymity given the firm's investment operations in the region.
“The problem is not now, but Ecuador in the face of elections,” the investor said. “The government is not popular, not because it is bad, but because of all the things it has to do. Now we have this oil environment. And Ecuador as a country - I’m not referring to this government - has a checkered history.”
Just over a year ago, Ecuador reached an agreement with the IMF for a $4.2 billion loan tied to a three-year economic program. However, faced with social unrest, the country failed to implement several points of the program, prompting the ratings agency, Moody’s Investors Service, to drop the country’s credit to junk status on February 6th.
While the IMF and Ecuador have maintained contact, the country, perhaps the hardest hit by the oil price plunge, is still waiting on a $348 million disbursement from the multilateral lending institution.
Ecuador, which left OPEC in order to increase its output, produces 540,000 barrels of oil per day. The oil price crash this past week prompted President Lenín Moreno of Ecuador to announce on Tuesday a series of austerity measures to account for oil prices falling below the $51 per barrel the national budget is based upon.
Also this week, a new public finance code, containing fiscal reform measures was brought to the country’s legislature. “This will bring calm to investors,” said Ferro, who added, “we have the full support of the IMF and we will be working closely with them in this situation.” Ecuador expects to get $1.4 billion from the IMF in 2020, he said.
In addition to the IMF, Ecuador also has a separate loan program with the World Bank, which it is hoping it can adjust before its next payment at the end of April. Ecuador is expecting to get $909 million this year from the World Bank.
“What we are trying to do is to get a larger disbursement than originally planned. The planned disbursement was $300 million but we are trying to change it to $400 million,” Ferro said, adding that the bank seemed open to the request.
CHINA AND GOLDMAN SACHS IN THE MIX
In addition to working with the IMF and World Bank, Ferro shed more light on a $2 billion line of credit that Moreno mentioned in a televised address on March 10.
The country is also negotiating the credit with two Chinese banks, Ferro said, adding that the talks have been going on since January. “The coronavirus has delayed them a bit, but by April we hope to announce the terms of these credit lines,” he said, declining to specifically name the banks.
“Our position in this negotiation has been that the credits be subject to no restrictions, and the government of China has agreed to it,” Ferro said, noting this as different from previous credit line terms that were earmarked for specific investment projects.
In addition, Ferro said Ecuador is renegotiating with China the size of amortization payments due in 2020 and 2021. “China has been open to improvements in the conditions of our existing credit lines,” he said.
The other large payment that Ecuador must make this year is a repo with Goldman Sachs for $515 million due in September, Ferro said.
“In the last months we have been trying to renegotiate to postpone this payment. We’re still working on this. Nothing has been defined yet, but even if we don’t reach an agreement, we will be able to make this payment,” he said.