Wall Street puts Ecuador’s investment risk above Argentina’s as oil prices plummet

Mar 10, 2020 | 14 comments

Ecuador poses one of South America’s highest financial risks for foreign investors, according to the JP Morgan international risk index. Ecuador has a rating of 2,793 compared to 2,783 for Argentina. Ecuador’s risk skyrocketed 811 points over the weekend as international oil prices suffered their worst drop since the 1990 Gulf War.

Ecuador’s risk index is determined by the U.S. Wall Street firm JP Morgan.

The highest risk rating in the region is Venezuela’s, which stands at 12,582.

According to experts, Ecuador’s high risk rating is also the result of uncertainty about the country’s loan agreement with the International Monetary Fund (IMF). “What the rating indicator means is that it will be prohibitive for the government to borrow money on the international markets in the near future,” says University of San Francisco business professor Santiago Mosquera. “If it were issued today, a short-term sovereign bond would have to offer above 20 percent interest to attract investors even if there were takers.”

Mosquera says the collapse of oil prices, due to failed negotiations between Saudi Arabia and Russia, was unexpected. “It was a shock but, on the other hand, oil prices had been drifting downward recently and the government was making little effort to adjust for it. Eventually, I believe prices will rebound but this could take months and, in the meantime, Ecuador is stuck with the horrible risk rating.”

The risk rating has prompted some selling of the country’s bonds. “Investors are selling Ecuadorian paper and looking for instruments with less risk of non-payment, such as U.S. Treasuries,” says Gonzalo Cucalón, manager of the Banrio securities house. “Given market uncertainty, buyers are looking for stability, not high yield.”

Due to Saudi Arabia’s decision to increase oil production and cut prices, the benchmark West Texas Crude price dropped 25 percent from Friday to Monday, to $31.13 per barrel. At the beginning of the year, the price was near $60.

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A second factor weighing on Ecuador’s financial prospects is confusion over its loan agreement with the IMF. As part of its agreement with the government, the global lender had required a number of austerity measures, including the elimination of most fuel subsidies. In October, President Lenin Moreno was forced by nationwide protests to backtrack on plans to eliminate diesel and some gasoline subsidies.

“We don’t know where we stand with the remainder of the IMF loans,” says Mosquera. “There will need to be more talks to resolve the issues and probably action by the National Assembly to make budget reductions, action it has so far refused to make.”

Ecuador’s risk will probably decline over time, Mosquera says, but he won’t predict when major improvement will be evident. “There is an element of hysteria in world markets at the moment. Not only are the markets dealing with oil shock but they have the impact of the coronavirus to consider too.”

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