Ecuador Ratings Lowered To 'CCC-/C' And Placed On CreditWatch Negative On Risks To Debt Service

  • Ecuador's already large budgetary financing needs have been exacerbated by the recent plunge in oil prices and the negative global economic impact of the COVID-19 pandemic.
  • On March 23, 2020, the Ecuadorian government announced that it would delay the upcoming March 27 interest payment on its 2022, 2025, and 2030 bonds. The government is seeking additional sources of funding to make the payment within the 30-day grace period ending April 27.
  • As a result, we are lowering our long- and short-term sovereign credit ratings on Ecuador to 'CCC-/C' from 'B-/B', reflecting that a default, distressed exchange, or redemption appears inevitable within six months, absent unanticipated significantly favorable changes in business, financial, and economic conditions.
  • We are also placing the sovereign credit ratings on CreditWatch with negative implications, reflecting the risk of a further downgrade to selective default ('SD') if Ecuador fails to secure funds to cover the interest payment within the grace period.

Rating Action

On March 25, 2020, S&P Global Ratings lowered its long- and short-term sovereign credit ratings on Ecuador to 'CCC-/C' from 'B-/B'. We also placed the ratings on CreditWatch with negative implications. In addition, we lowered our transfer and convertibility assessment for Ecuador to 'CCC-' from 'B-'.

CreditWatch

The CreditWatch negative placement reflects at least a 1-in-2 likelihood of a downgrade to 'SD' during the next few weeks if we conclude that Ecuador will not be able or willing to service the interest payments on its 2022, 2025, and 2030 bonds before the grace period expires. We could also downgrade the sovereign if the government were to propose a debt exchange that we would consider a distressed debt exchange, based on our criteria. We could remove the ratings from CreditWatch if the government makes the payment before the 30-day grace period expires.

Rationale

The 'CCC-/C' ratings reflect our view that a default, distressed exchange, or redemption appears inevitable within the next six months. Ecuador depends on favorable business, financial, and economic conditions to meet its financial obligations.
The administration of President Lenin Moreno, which had earlier entered into an Extended Fund Facility program with the International Monetary Fund, has announced austerity measures to counterbalance the recent negative shock to public finances, highlighting its commitment to stabilize the economy. Nonetheless, policy execution remains subject to growing political challenges. Amid rising pressures from the COVID-19 pandemic, opposition parties in Congress recently asked the government to suspend debt service payments.
The government announced on March 23, 2020, that it would delay the March 27 coupon payments on global bonds maturing in 2022, 2025, and 2030, for a total of $200 million. The government plans to immediately devote more resources to meet health care needs while securing funding from multilateral creditors.
Our ratings on Ecuador are constrained by elevated financing needs, external vulnerabilities, weak institutions, relatively low wealth levels, and lack of monetary and exchange rate flexibility. With weak domestic capital markets, Ecuador's rating trajectory depends on its access to official and external commercial financing to cover the government's financing needs and support foreign exchange reserves.

Key Statistics

Table 1

Ecuador--Selected Indicators
20132014201520162017201820192020f2021f2022f2023f
Economic indicators (%)
Nominal GDP (bil. LC)95.13101.7399.2999.94104.30107.56107.42106.33109.06112.14115.64
Nominal GDP (bil. $)95.13101.7399.2999.94104.30107.56107.42106.33109.06112.14115.64
GDP per capita (000s $)6.06.36.16.06.26.36.26.16.16.26.3
Real GDP growth4.93.80.1(1.2)2.41.4(0.4)(1.7)1.31.51.8
Real GDP per capita growth3.32.2(1.4)(2.7)0.9(0.1)(1.8)(3.1)(0.1)0.10.4
Real investment growth9.53.4(9.2)(11.5)11.71.73.30.51.52.52.5
Investment/GDP29.429.427.224.927.227.928.929.529.529.830.0
Savings/GDP28.428.824.926.226.726.528.427.727.829.129.2
Exports/GDP28.628.121.319.520.822.623.421.021.421.321.1
Real exports growth2.66.2(0.6)1.40.71.23.0(11.5)3.01.01.0
Unemployment rate4.23.84.85.24.63.74.94.84.74.74.7
External indicators (%)
Current account balance/GDP(1.0)(0.7)(2.2)1.3(0.5)(1.4)(0.5)(1.8)(1.7)(0.6)(0.7)
Current account balance/CARs(3.1)(2.1)(9.2)5.7(1.9)(5.2)(1.9)(7.5)(6.5)(2.4)(2.6)
CARs/GDP32.031.324.423.224.326.426.823.925.927.226.9
Trade balance/GDP(0.6)(0.1)(1.7)1.60.3(0.2)0.8(0.5)(0.5)0.50.4
Net FDI/GDP0.80.81.30.80.61.30.90.91.01.11.1
Net portfolio equity inflow/GDP(0.5)(0.4)1.4(0.1)(0.1)0.00.00.00.00.00.0
Gross external financing needs/CARs plus usable reserves123.1121.6136.9129.4146.7153.3145.4156.7150.1141.9140.3
Narrow net external debt/CARs26.542.176.797.6120.8122.3142.5164.9152.8145.0146.6
Narrow net external debt/CAPs25.741.370.2103.5118.6116.2139.8153.4143.5141.6142.8
Net external liabilities/CARs17.919.433.128.130.635.058.669.867.466.966.9
Net external liabilities/CAPs17.319.030.329.730.133.257.564.963.365.465.2
Short-term external debt by remaining maturity/CARs20.521.230.232.334.231.531.037.334.132.432.7
Usable reserves/CAPs (months)0.00.20.2(0.3)(0.8)(1.2)(1.0)(0.8)(0.7)(0.6)(0.4)
Usable reserves (mil. $)445433(500)(1,828)(3,072)(2,477)(1,936)(1,792)(1,530)(1,118)(818)
Fiscal indicators (general government; %)
Balance/GDP(3.8)(5.5)(4.5)(5.7)(5.0)(2.0)(2.1)(2.9)(2.3)(1.5)(1.2)
Change in net debt/GDP4.86.13.78.08.13.01.42.92.31.51.2
Primary balance/GDP(2.8)(4.5)(3.1)(4.2)(2.8)0.50.5(0.1)0.51.31.6
Revenue/GDP32.330.328.326.126.930.630.228.129.930.530.6
Expenditures/GDP36.135.832.831.831.932.632.331.032.232.031.8
Interest/revenues3.23.35.16.07.98.18.710.09.49.29.2
Debt/GDP23.828.532.040.747.349.551.154.555.555.455.0
Debt/revenues73.894.0113.4156.0175.7161.7169.2194.0185.5181.8179.6
Net debt/GDP20.325.129.437.243.845.446.950.251.351.451.0
Liquid assets/GDP3.53.42.73.53.64.14.24.34.24.13.9
Monetary indicators (%)
CPI growth2.73.64.01.70.4(0.2)0.30.71.21.31.3
GDP deflator growth3.13.0(2.5)1.91.91.70.30.71.21.31.3
Exchange rate, year-end (LC/$)1.001.001.001.001.001.001.001.001.001.001.00
Banks' claims on resident non-gov't sector growth9.39.9(2.1)5.016.512.211.11.95.57.97.9
Banks' claims on resident non-gov't sector/GDP28.028.828.930.133.636.640.741.943.145.247.3
Foreign currency share of claims by banks on residentsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A
Foreign currency share of residents' bank deposits0.00.00.00.00.00.00.00.00.00.00.0
Real effective exchange rate growth2.22.913.60.1(100)N/AN/AN/AN/AN/AN/A
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Ecuador--Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment6Political institutions and pillars of macroeconomic stability are still developing. Future macroeconomic policies are difficult to predict.
Weak debt payment culture.
Economic assessment5Based on GDP per capita (US$) and growth trends as per Selected Indicators in table 1.
Real per capita GDP growth has been significantly less than peers. Real GDP per capita 10-year weighted average growth rate is estimated at -0.5% in 2020.
External assessment5Based on narrow net external debt and gross external financing needs/(CAR + usable reserves) as per Selected Indicators in table 1.
Fiscal assessment: flexibility and performance3Based on the change in net general government debt (% of GDP) as per Selected Indicators in table 1.
Fiscal assessment: debt burden3Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in table 1.
Nonresidents hold around 60% of government commercial debt.
Monetary assessment6
Dollarized economy.
No ability to act as a lender of last resort for the financial system. Local markets are underdeveloped.
Application of exchange restrictions.
Indicative ratingb-
Notches of supplemental adjustments and flexibility(3)A default, distressed exchange, or redemption appears inevitable within six months, absent unanticipated significantly favorable changes in business, financial, and economic conditions
Final rating
Foreign currencyCCC-
Notches of uplift0Default risks do not apply differently to foreign- and local-currency debt.
Local currencyCCC-
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