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Ecuador, Government of -- Moody's affirms Ecuador's Caa3 rating; changes outlook to stable

·19 min read

Rating Action: Moody's affirms Ecuador's Caa3 rating; changes outlook to stableGlobal Credit Research - 26 Feb 2021New York, February 26, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Ecuador's long-term foreign-currency issuer and senior unsecured rating at Caa3 and changed the outlook to stable from negative.The outlook change to stable from negative balances the favorable interest and amortization payment schedule on market debt and substantial external financing under the International Monetary Fund (IMF) program, with lingering challenges to reducing fiscal imbalances, that could once again raise credit risks over the medium-term.The affirmation of the Caa3 rating reflects Moody's view that elevated credit risks remain, given that the implementation of adjustment measures will hinge on the incoming government's ability to forge alliances and garner support from legislators to enact meaningful fiscal consolidation and reforms to support the economic recovery. Liquidity pressures and political risks will remain high even if key policies under the IMF program are adopted, constraining the sovereign's credit prospects and raising questions about Ecuador's capacity to meet future debt service obligations over the medium-term. Moreover, an inability to enact a strong set of economic and financial reforms could jeopardize the credibility of the dollarized regime.At the same time Moody's has affirmed the long-term foreign-currency senior unsecured rating for unrestructured debt at C, pertaining to the approximately $52 million (including accrued interest) of the 2030 global bonds that have been in default since 2008.The foreign currency country ceiling is unaffected by today's rating action and remains at Caa2, reflecting the economy's limited ability to attract foreign currency flows and limited central bank independence.RATINGS RATIONALERATIONALE FOR THE CHANGE IN OUTLOOK TO STABLE FROM NEGATIVEMATERIALLY LOWER LIQUIDITY PRESSURES OVER THE NEAR-TERMThe debt restructuring in 2020 provided substantial liquidity relief by extending principal maturities and reduced interest costs. Moody's estimates savings of approximately $10 billion (10.2% of GDP) in interest and principal over the next four years and $4 billion (4.1% of GDP) more between 2025-30, as compared to the prior debt-service schedule. Additionally, the front-loaded $6.5 billion IMF program provided $4 billion in financing in 2020, and will provide a further $1.5 billion in 2021 and $1 billion in 2022. The first review under the IMF program has shown that the government met or exceeded all quantitative targets, and that deficit reduction remains slightly better than was expected by the program by end-2020.Additionally, there is greater clarity about the policy platform of the main presidential candidates from the recent 7 February general election. Moody's notes that neither of the presidential candidates that are set to contest the 11 April run-off vote have explicitly mentioned any intention to restructure market debt given the very favorable near-term repayment structure. However, the incoming government, following the run-off election, will face substantial challenges in navigating the economic recovery, reducing the fiscal deficit, supporting the dollarized regime and achieving fiscal and economic sustainability.RATIONALE FOR THE RATING AFFIRMATION AT Caa3LIMITED CAPACITY TO MEET FUTURE DEBT OBLIGATIONS ABSENT EXTENSIVE MACROECONOMIC REFORMSIn Moody's opinion, the incoming administration will face substantial challenges. The next government is set to inherit the strongest part of the IMF program's fiscal consolidation requirements, which includes a fiscal reform to shore up over 2% of GDP in new revenues, but will only receive $2 billion out of a $6.5 billion program. The economy's ability to sustain higher growth beyond the recovery remains highly limited. The implementation of adjustment measures will hinge on the incoming government's ability to forge alliances and garner support from a highly fragmented legislature, as revealed by the recent 7 February election.The sovereign's Caa3 rating reflects many longstanding challenges to Ecuador's credit profile, and recognizes that anchoring public debt sustainability will require a commitment to ambitious, yet credible, fiscal consolidation. Balancing the need for a large fiscal adjustment with support for an economic recovery will be complicated from a policy management standpoint. Although Moody's expects a rebound of 4% growth in 2021, economic output is unlikely to reach pre-crisis levels until at least 2024. Considering the severity of the recession and uncertainty from the general election, Moody's expects that private investment and household consumption will rebound only as a result of base effects, but that economic activity will remain inherently weak when controlling for the favorable base effects. The economy will struggle to post growth in 2022 and beyond because of long-standing competitiveness and productivity challenges as a result of dollarization, structural rigidities in the economy and a dearth of private investment. This will continue to weigh on the country's economic strength.Although the economy benefits from a higher quality of installed infrastructure than many regional peers, competitiveness and productivity challenges stem from (1) a very low amount of foreign direct investment (FDI) into the economy with little incentives to attract foreign investment into profitable sectors, (2) relatively high real wages within a rigid and uncompetitive labor market, and (3) extensive government regulation that inhibits private business activity, among other longstanding structural barriers. Implementing adjustment measures under the prior IMF program demonstrated how difficult governability can be in Ecuador with a fragmented congress and with social rejection of fiscal and economic reforms.In the absence of strong output growth following the economic rebound from the pandemic, fiscal consolidation prospects and debt sustainability will remain tenuous. This raises questions about Ecuador's capacity to meet future debt service obligations over the medium-term. Moreover, reforms to fortify the legal and institutional framework for the central bank continue to be postponed, such that any shift away from policies that meaningfully reduce the fiscal deficit, could jeopardize the credibility of the dollarized regime.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSEcuador's ESG Credit Impact Score is highly negative (CIS-4), reflecting a very highly negative governance issuer profile score that has resulted in multiple defaults, and high exposure to environmental and social risks.Ecuador's exposure to environmental risks is highly negative (E-4 issuer profile score), related to physical climate and carbon transition risks. Ecuador's economy (particularly primary sector activity) has been subject to droughts and floods from the El Niño weather shock that happens at irregular intervals. Natural disasters like volcanic eruptions and earthquakes over the past decade have led to unexpected fiscal costs and localized economic disruption. Exposure to carbon transition risks, albeit over the long term, stem from hydrocarbon dependence on exports and government revenues.Exposure to social risks is also highly negative (S-4 issuer profile score). Social considerations have played a role in increasing political risk in the country. As illustrated in October 2019, violent protests broke out against government measures to eliminate fuel subsidies, forcing the government to backtrack on the subsidy removal and to devise complimentary measures in support of fiscal consolidation under an IMF program. The risk of social unrest constrains the sovereign's ability to adopt policies that address longstanding distortions that inhibit economic growth in the country.The influence of governance on Ecuador's credit profile is very highly negative (G-5 issuer profile), reflecting weak rule of law and high levels of corruption but also the sovereign's default track record. Longstanding concerns about public financial and fiscal management, willingness to repay (which in the past had a hand in defaults), and the overall clarity and predictability of policymaking constrain Ecuador's credit profile.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSEvidence of a substantial amount of financing flows at highly affordable rates that fully cover the sovereign's funding needs over the medium term, such that the sovereign is able to avoid payments stress, would decrease the likelihood of a credit event and losses to bondholders, supporting a higher rating. Additionally, significant progress on reducing the fiscal imbalance, evidence of stronger economic growth prospects as a result of the adoption of structural reforms that support higher potential output growth, could support a higher rating.Conversely, the rating could be downgraded if Moody's were to conclude that losses to investors from a possible credit event or restructuring of government debt would not be consistent with a Caa3 rating, based on a further worsening of Ecuador's economic and fiscal prospects.GDP per capita (PPP basis, US$): 11,929 (2019 Actual) (also known as Per Capita Income)Real GDP growth (% change): 0% (2019 Actual) (also known as GDP Growth)Inflation Rate (CPI, % change Dec/Dec): -0.1% (2019 Actual)Gen. Gov. Financial Balance/GDP: -5% (2019 Actual) (also known as Fiscal Balance)Current Account Balance/GDP: -0.1% (2019 Actual) (also known as External Balance) External debt/GDP: 48.5 Economic resiliency: b3 Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.On 23 February 2021, a rating committee was called to discuss the rating of the Ecuador, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. Other views raised included: The issuer has become increasingly susceptible to event risks.The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Jaime Reusche VP - Senior Credit Officer Sovereign Risk Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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