ECUADOR RE-ENTERS BOND MARKET

UNCLAS QUITO 002836

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON EINV EC
SUBJECT: ECUADOR RE-ENTERS BOND MARKET


1. Summary. Ecuador successfully placed about $650 million
in bonds on December 7, marking its first return to the
private international finance market since its 1999 default.
According to Minister of Economy and Finance Magdalena
Barreiro, Ecuador will use the proceeds to buy back higher
priced debt, with a potential savings of $120 million over
the next 10 years. Venezuela, which originally said it would
purchase about $300 million of the bonds, ended up with only
about $25 million. Ecuador, with the recent appointment of a
new Central Bank Board is also closer to receiving a $400
million loan from the FLAR. As a result, analysts are saying
that Ecuador could be over-financed by as much as $500
million in 2006. End Summary.

Back in the Market
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2. Ecuador tried to return to the international debt market
last April, but stopped those efforts when former President
Gutierrez was removed from office. That would have marked
Ecuador's first return to the international debt markets
after its 1999 default. President Palacio's first Economy
Minister (and now presidential candidate) Rafael Correa
halted the effort. Correa's tenure was short-lived.
International financial markets welcomed his replacement,
Magdalena Barreiro, and the marked change in direction from
Correa's statist economic policies to more sustainable ones.


3. Demand was strong for the bond offer on December 7. The
10 year bonds offered a yield of 10.75% (9.375% coupon). Of
the approximately $1.5 billion booked, Ecuador sold $650
million worth of bonds. Venezuela, which originally touted it
would purchase $300 million of the bonds, purchased only
about $25 million.

More Financing on its Way
--------------


4. Congress recently approved a new board of directors for
the Central Bank Board. Most believe this was the last
remaining hurdle for Ecuador to receive a $400 million loan
from the Latin America Reserve Fund (FLAR). Ecuador will use
the FLAR funds and the 2015 bond proceeds to buy back some of
its outstanding 2012 bonds (which have a 12% interest rate)
and local treasury notes (CETES). Barreiro estimates that
the buybacks of some of the 2012 bonds and CETES could save
Ecuador $120 million in interest costs over the next 10 years.

Over-financed in 2006?
--------------


5. Financial analysts at Credit Suisse First Boston (CSFB)
estimate that Ecuador could be over financed by as much as
$500 million in 2006. There are, however, certain risks that
must be considered. CFSB reports that for every $1/barrel
decline in oil prices, government revenues fall by $30
million on an annualized basis. Thus, a notable decline in
oil prices could drastically effect the fiscal situation.
There have been, and will continue to be in the 2006 election
season, pressure on the GOE to spend more on social and other
development projects, adding more fiscal pressure. The
government continues to subsidize the energy sector and might
have to spend hundreds of millions more to finance
investments in the electricity generation and distribution
over the next several years to avoid energy shortages.

Comment
--------------


6. Ecuador's return to the international debt market and
eventual FLAR loan should ease some of the fiscal pressure on
the GOE, at least in 2006. Still, new financing sources do
not address the fundamental problems of political instability
and poor investment conditions in the country. Eventually,
Ecuador will have to address these problems, and hopefully it
will do so before cyclical factors such as a decline in oil
prices or demand for emerging market debt recur.
JEWELL