Dear International Friend,
The Global Sovereign Debt research department of Bear Stearns has recently provided a very positive update on Ecuador's bonds. They have stated:
Introduction/Recommendation At the risk of seeming to endorse Ecuador's debt restructuring, which we do not wish to do, we believe the short- to medium-term economic and credit outlook has improved and Ecuadorian bonds look undervalued. The combination of fiscal restraint, structural reforms, debt service relief and the windfall from higher oil prices supports a more positive view. We consider Moody's Caa3 sovereign rating appropriate for Ecuador during the past year, but not necessarily a good indicator of its sovereign credit outlook for 2001. If Ecuador's economic strategy stays on track, we believe it can offer investors compelling upside in its 2012 and 2030 eurobonds over a six- to nine-month horizon. This outlook for Ecuador fits into our view of the Andean region, where we see a convergence underway, with outliers like Peru (on the higher-credit-quality end) and Ecuador (on the lower end) moving gradually closer to the region's center, represented by Colombia and Venezuela. Despite their obvious differences, we believe it may become more difficult for countries in this small region to differentiate themselves.
We believe investors should build positions in Ecuadorian bonds. The speed at which this is done should depend on the investor's view of the overall market. Given its weak credit quality, Ecuador likely remains a high-beta country, meaning a sell-off in the EMBI in the near term could cause Ecuador bonds to underperform. For investors of the opinion that emerging market spreads are likely to stabilize, we recommend a more aggressive build-up of positions.
Regarding our spread convergence theme among the Andean countries, we expect Ecuador to gain the most, first in comparison with Peru, then Colombia and finally Venezuela. We would target Ecuador as trading +200 bps to Venezuela (assuming Venezuela does not get repriced to the positive side by the market, which it could, but that is analysis for another report).
Economic Strategy on Track Ecuador is in compliance with the policies and quantitative targets of its March 2000 IMF standby agreement. Public investment spending is running below the amount contained in the program by 1.1% of GDP during the first half of 2000, and government revenues exceeded targets by 1.2% of GDP during the same period as a result of the oil windfall. Ecuador is on track to meet its revised primary surplus target this year of 5.6% of GDPor $735 million up from its original target of $723 million. Accordingly, the target for the deficit of the non-financial public sector has been tightened, to 2.8% of GDP ($374 million) from 3.9% ($430 million). Banking sector reform is also proceeding rapidly, reversing the decline in bank deposits and moving closer to the goal of a more efficient, adequately capitalized and better supervised financial system. The timetable for dollarization was met, and the economy is now fully dollarized. The only quantitative performance criteria Ecuador failed to meet this year was for domestic non-interest payment arrears in April. We expect that when the IMF Board releases its review of Ecuador's June targets, it will find it in compliance on all quantitative targets, given the release of frozen bank deposits during the second quarter.
This is just part of a much more extensive report issued at the Bear Sterns site and seems to match the positive input I am getting from more and more investors I talk with that are familiar with the position there. Our November real estate tour is completely full but we are setting up tours for late February and may 2001. For details contact Francesca Scott at firstname.lastname@example.org
Until then, good investing!