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Ecuador Re-Elects Correa on Vow to Spend Amid Deficit

By Nathan Gill
February 18, 2013 6:05 PM EST 4 Comments
Ecuador’s Re-elected President Rafael Correa
Ecuador’s Re-elected President Rafael Correa

(Corrects size of deficit in 31st paragraph of story published Feb. 18)

Rafael Correa was re-elected as Ecuador’s president yesterday after pledging to boost spending on the poor while the country runs up its biggest-ever budget deficit.

Preliminary voting tallies showed Correa with 57 percent of the vote in his bid for another four-year term, the National Electoral Council said yesterday. With 71 percent of the ballots counted, Correa’s nearest rival, Guillermo Lasso, had polled 23 percent, the agency said. Final results will be released in days, the agency said.

Correa, Ecuador’s first president to be re-elected since 1968, begins a new term with few options to finance his campaign pledges as stagnant oil prices and slumping growth limit funds to boost outlays on social welfare. The self-described socialist revolutionary, who dubbed foreign bondholders “true monsters” when he defaulted on $3.2 billion of debt in 2008, may now return to overseas credit markets to take advantage of a record rally in high-yield debt to help fund spending needed to sustain an economic expansion.

“I don’t see very simple solutions to attract more investment,” said Carlos Andres Baca, an analyst at Quito-based economic and political consulting firm Politik. “It won’t be easy to find new financing.”

‘Citizens’ Revolution’

As the head of a nation where about a third of the 15.4 million population lives in poverty, the former economics professor has promised to “radicalize” his “citizens’ revolution” with free education and health care.

“This victory belongs to each of you,” Correa said yesterday from the presidential palace in Quito. “No one and nothing is stopping this revolution, friends, we are making history.”

Runner-up Lasso, the former chief executive officer of the South American nation’s second-biggest publicly traded bank, Banco de Guayaquil SA, conceded defeat in a speech from his hometown of Guayaquil. “I recognize the triumph of President Correa,” Lasso said last night.

While the 2008 default as well as new laws nationalizing the country’s oil reserves provided short-term economic gains for the president since he took office in 2007, the 49-year-old Correa, an ally of Venezuela’s Hugo Chavez, is now paying the cost with stagnant crude output and declines in private investment needed to boost growth.

Credit Markets

One option the government is planning is a return to international credit markets.

Finance Ministry officials and the lending arm of Ecuador’s state-run pension fund, Biess, are in talks with Citigroup Inc. and JPMorgan Chase & Co. to sell debt in international markets, Chief Executive Officer Efrain Vieira said in a Jan. 28 interview.

Vieira, who manages $9.53 billion for the country’s retirees, said Biess is seeking a yield of 6.5 percent, less than the 7 percent to 7.5 percent banks say it may obtain.

Ecuador, whose B rating from Standard & Poor’s is five levels below investment grade, would be the least-creditworthy country to sell debt abroad since similarly ranked Lebanon in November issued $500 million of bonds due in 2023 to yield 6 percent.

Bolivia, rated two levels higher at BB-, sold $500 million of bonds due in 2022 to yield 4.875 percent in October. Zambia, ranked one level above Ecuador at B+, issued $750 million of notes maturing in 2022 to yield 5.632 percent in September.

Pension Fund

The state-run pension fund’s plan to sell at least $200 million of bonds abroad this year would be a prelude to Ecuador’s first global sovereign offering since 2005, according to Walter Spurrier, director of Guayaquil-based economic research company Grupo Spurrier.

“The government wants to return to the market, even more after seeing the appetite for risky countries like Bolivia,” Spurrier, whose clients include JPMorgan and the International Monetary Fund, said in an interview from Guayaquil. By using the pension fund to sell bonds, “it could be that they’re putting their toe in the water to check the temperature,” he said.

Finance Minister Patricio Rivera and central bank President Diego Martinez didn’t reply to interview requests made through their press offices to discuss plans to issue bonds. In July, former central bank President Pedro Delgado said Ecuador was “working hard” to return to the credit market.

“Ecuador needs outside capital to continue to develop the oil industry and remain competitive,” Cynthia Arnson, director of the Latin American program at the Woodrow Wilson International Center for Scholars, said in a telephone interview. “They need outside capital but whether they will be able to attract private capital is a huge question mark.”

An increase in the price of oil, tax increases and loans from China have helped Correa more than double spending in the past six years, fueling growth.

‘Substitute Financing’

Now, with oil prices forecast to remain unchanged around $95 per barrel into 2014, the next government will struggle to find money to finance campaign promises, said former Finance Minister Fausto Ortiz, who worked with Correa in 2007-2008.

Ecuador’s economy, South America’s seventh biggest, has grown by an average of 5.2 percent a year since Correa came to power in January 2007, while inflation has averaged 4.8 percent, according to government data.

The central bank forecasts growth of 4 percent this year, down from an estimated 4.8 percent in 2012. Inflation will slow to an average 3.8 percent in 2013, less than the 5.1 percent average last year, according to government data.

Ecuador uses the U.S. dollar as its official currency.

Ecuador is “at the mercy of oil prices,” Capital Markets economist Michael Henderson said today in a research note to clients. “Government spending cannot continue to grow at its recent pace and if fiscal policy isn’t tightened now Ecuador risks a harder landing further ahead.”

Before Correa

Before Correa, Ecuador saw three elected presidents fail to complete their terms. Abdala Bucaram, who adopted the nickname “El Loco” or “Madman” while in power, was voted out of office by Congress in 1997 after being declared mentally unfit to rule.

Jamil Mahuad, a Harvard University professor who led Ecuador’s 1999 default and presided over the collapse of the nation’s financial system, stepped down after street protests and a military uprising left him without support in 2000.

Lucio Gutierrez, a candidate in this year’s election, was thrown out by Congress in 2005 after his decision to fill the Supreme Court with allies was met by months of street protests and a military rebellion. Early voting results showed the former president running in third place with 6.5 percent of the vote.

After taking power, Correa pushed through a constitutional rewrite, which expanded state control over natural resources and stripped the central bank of its autonomy. He then called for special presidential elections in 2009 to affirm his mandate.

Neither Correa nor Lasso responded to interview requests.

Oil, Revenue

The price of oil, which provides the government with about 48 percent of its revenue, has jumped 81 percent to $95.86 a barrel since Correa took office, touching a record $145.29 in July 2008, data compiled by Bloomberg show. That compares with a low of $10.72 per barrel in 1998 during Mahuad’s administration.

Ecuador holds South America’s third-largest oil reserves and ranks as the Organization of Petroleum Exporting Countries’ smallest producer with an estimated output capacity of 505,000 barrels of crude a day.

In remarks to reporters after the election yesterday, Correa said he’s not worried about how the government will attract investment to help finance this year’s $3.68 billion budget deficit, the widest on record according to the Finance Ministry data dating back to 2001. The government needs about $6 billion to cover its total financing needs, according to the ministry.

“There is foreign investment, if more comes, better,” Correa said. “What this president will never do is mortgage this country to achieve foreign investment goals.”

Public Works

Ecuador’s Finance Minister Patricio Rivera said in December the government plans to use a $2 billion loan from China and credit tied to specific public works projects from regional multilateral lenders to cover the majority of its 2013 financing needs. He didn’t say where the remaining $4 billion will come from.

Ecuadoreans also voted for a new congress. Correa’s ruling Alianza Pais political party may increase its control of the legislature to 80 to 100 of the assembly’s 137 seats, Eurasia Group analyst Risa Grais-Targow said in a Feb. 11 research note. With 32 percent of votes cast for congressional candidates counted, Correa’s party is leading with 51 percent of the vote followed by Lasso’s CREO party with 12 percent, the electoral council said. Final congressional voting results will be published later this week.

China, Commodities

In programs similar to those implemented by Chavez, Correa has used loans from China to rebuild the nation’s crumbling energy infrastructure and expand its hospital system. The government in January boosted monthly cash handouts to the poor by 43 percent.

Home to untapped copper reserves similar to those of Chile and Peru, the world’s top producers, Ecuador has signed loans for $7.3 billion from China since 2009, or about one-third of the Andean country’s annual budget, according to data compiled by Bloomberg based on government announcements.

While Ecuador will have difficulty persuading investors to trust it after defaulting twice in a decade, global demand for higher-yielding assets means the government will probably find buyers willing to take the risk, Carl Ross, a managing director at Oppenheimer & Co., said. Investors will probably demand a yield of at least 10 percent for a 10-year sovereign bond, he said.

’Rogue’ Borrower

“Ecuador is about as rogue a borrower as you really get, but this is the kind of market where maybe even an Ecuador can issue,” Ross said in a telephone interview from Atlanta. “In this market, with the low interest rates that we have, almost anything is possible.”

Ecuador, which has South American’s lowest foreign direct investment rate as a percentage of GDP, has seen yields on its $650 million of dollar notes due in 2015, the country’s sole-performing foreign bond, drop 1.04 percentage point to 8.01 percent in the past two months amid a record rally in global high-yield debt.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries this year has narrowed 116 basis points, or 1.16 percentage point, to 710 basis points, according to JPMorgan Chase & Co.’s EMBIG indexes. That compares with a nine basis-point increase for the EMBIG, making Ecuador the third-riskiest economy in South America after Venezuela and Argentina, JPMorgan data show.

“This is a government that’s characterized by being ideological in its words and pragmatic in its actions,” Politik’s Baca said. “If it’s necessary to sell bonds, I don’t think they’d have a problem finding a justification to do it.”

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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