Overview
- 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 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020f | 2021f | 2022f | 2023f | ||||||||||||||
| Economic indicators (%) | ||||||||||||||||||||||||
| Nominal GDP (bil. LC) | 95.13 | 101.73 | 99.29 | 99.94 | 104.30 | 107.56 | 107.42 | 106.33 | 109.06 | 112.14 | 115.64 | |||||||||||||
| Nominal GDP (bil. $) | 95.13 | 101.73 | 99.29 | 99.94 | 104.30 | 107.56 | 107.42 | 106.33 | 109.06 | 112.14 | 115.64 | |||||||||||||
| GDP per capita (000s $) | 6.0 | 6.3 | 6.1 | 6.0 | 6.2 | 6.3 | 6.2 | 6.1 | 6.1 | 6.2 | 6.3 | |||||||||||||
| Real GDP growth | 4.9 | 3.8 | 0.1 | (1.2) | 2.4 | 1.4 | (0.4) | (1.7) | 1.3 | 1.5 | 1.8 | |||||||||||||
| Real GDP per capita growth | 3.3 | 2.2 | (1.4) | (2.7) | 0.9 | (0.1) | (1.8) | (3.1) | (0.1) | 0.1 | 0.4 | |||||||||||||
| Real investment growth | 9.5 | 3.4 | (9.2) | (11.5) | 11.7 | 1.7 | 3.3 | 0.5 | 1.5 | 2.5 | 2.5 | |||||||||||||
| Investment/GDP | 29.4 | 29.4 | 27.2 | 24.9 | 27.2 | 27.9 | 28.9 | 29.5 | 29.5 | 29.8 | 30.0 | |||||||||||||
| Savings/GDP | 28.4 | 28.8 | 24.9 | 26.2 | 26.7 | 26.5 | 28.4 | 27.7 | 27.8 | 29.1 | 29.2 | |||||||||||||
| Exports/GDP | 28.6 | 28.1 | 21.3 | 19.5 | 20.8 | 22.6 | 23.4 | 21.0 | 21.4 | 21.3 | 21.1 | |||||||||||||
| Real exports growth | 2.6 | 6.2 | (0.6) | 1.4 | 0.7 | 1.2 | 3.0 | (11.5) | 3.0 | 1.0 | 1.0 | |||||||||||||
| Unemployment rate | 4.2 | 3.8 | 4.8 | 5.2 | 4.6 | 3.7 | 4.9 | 4.8 | 4.7 | 4.7 | 4.7 | |||||||||||||
| 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/GDP | 32.0 | 31.3 | 24.4 | 23.2 | 24.3 | 26.4 | 26.8 | 23.9 | 25.9 | 27.2 | 26.9 | |||||||||||||
| Trade balance/GDP | (0.6) | (0.1) | (1.7) | 1.6 | 0.3 | (0.2) | 0.8 | (0.5) | (0.5) | 0.5 | 0.4 | |||||||||||||
| Net FDI/GDP | 0.8 | 0.8 | 1.3 | 0.8 | 0.6 | 1.3 | 0.9 | 0.9 | 1.0 | 1.1 | 1.1 | |||||||||||||
| Net portfolio equity inflow/GDP | (0.5) | (0.4) | 1.4 | (0.1) | (0.1) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||||||
| Gross external financing needs/CARs plus usable reserves | 123.1 | 121.6 | 136.9 | 129.4 | 146.7 | 153.3 | 145.4 | 156.7 | 150.1 | 141.9 | 140.3 | |||||||||||||
| Narrow net external debt/CARs | 26.5 | 42.1 | 76.7 | 97.6 | 120.8 | 122.3 | 142.5 | 164.9 | 152.8 | 145.0 | 146.6 | |||||||||||||
| Narrow net external debt/CAPs | 25.7 | 41.3 | 70.2 | 103.5 | 118.6 | 116.2 | 139.8 | 153.4 | 143.5 | 141.6 | 142.8 | |||||||||||||
| Net external liabilities/CARs | 17.9 | 19.4 | 33.1 | 28.1 | 30.6 | 35.0 | 58.6 | 69.8 | 67.4 | 66.9 | 66.9 | |||||||||||||
| Net external liabilities/CAPs | 17.3 | 19.0 | 30.3 | 29.7 | 30.1 | 33.2 | 57.5 | 64.9 | 63.3 | 65.4 | 65.2 | |||||||||||||
| Short-term external debt by remaining maturity/CARs | 20.5 | 21.2 | 30.2 | 32.3 | 34.2 | 31.5 | 31.0 | 37.3 | 34.1 | 32.4 | 32.7 | |||||||||||||
| Usable reserves/CAPs (months) | 0.0 | 0.2 | 0.2 | (0.3) | (0.8) | (1.2) | (1.0) | (0.8) | (0.7) | (0.6) | (0.4) | |||||||||||||
| Usable reserves (mil. $) | 445 | 433 | (500) | (1,828) | (3,072) | (2,477) | (1,936) | (1,792) | (1,530) | (1,118) | (818) | |||||||||||||
| Fiscal indicators (general government; %) | ||||||||||||||||||||||||
| Balance/GDP | (3.8) | (5.5) | (4.5) | (5.7) | (5.0) | (2.0) | (2.1) | (2.9) | (2.3) | (1.5) | (1.2) | |||||||||||||
| Change in net debt/GDP | 4.8 | 6.1 | 3.7 | 8.0 | 8.1 | 3.0 | 1.4 | 2.9 | 2.3 | 1.5 | 1.2 | |||||||||||||
| Primary balance/GDP | (2.8) | (4.5) | (3.1) | (4.2) | (2.8) | 0.5 | 0.5 | (0.1) | 0.5 | 1.3 | 1.6 | |||||||||||||
| Revenue/GDP | 32.3 | 30.3 | 28.3 | 26.1 | 26.9 | 30.6 | 30.2 | 28.1 | 29.9 | 30.5 | 30.6 | |||||||||||||
| Expenditures/GDP | 36.1 | 35.8 | 32.8 | 31.8 | 31.9 | 32.6 | 32.3 | 31.0 | 32.2 | 32.0 | 31.8 | |||||||||||||
| Interest/revenues | 3.2 | 3.3 | 5.1 | 6.0 | 7.9 | 8.1 | 8.7 | 10.0 | 9.4 | 9.2 | 9.2 | |||||||||||||
| Debt/GDP | 23.8 | 28.5 | 32.0 | 40.7 | 47.3 | 49.5 | 51.1 | 54.5 | 55.5 | 55.4 | 55.0 | |||||||||||||
| Debt/revenues | 73.8 | 94.0 | 113.4 | 156.0 | 175.7 | 161.7 | 169.2 | 194.0 | 185.5 | 181.8 | 179.6 | |||||||||||||
| Net debt/GDP | 20.3 | 25.1 | 29.4 | 37.2 | 43.8 | 45.4 | 46.9 | 50.2 | 51.3 | 51.4 | 51.0 | |||||||||||||
| Liquid assets/GDP | 3.5 | 3.4 | 2.7 | 3.5 | 3.6 | 4.1 | 4.2 | 4.3 | 4.2 | 4.1 | 3.9 | |||||||||||||
| Monetary indicators (%) | ||||||||||||||||||||||||
| CPI growth | 2.7 | 3.6 | 4.0 | 1.7 | 0.4 | (0.2) | 0.3 | 0.7 | 1.2 | 1.3 | 1.3 | |||||||||||||
| GDP deflator growth | 3.1 | 3.0 | (2.5) | 1.9 | 1.9 | 1.7 | 0.3 | 0.7 | 1.2 | 1.3 | 1.3 | |||||||||||||
| Exchange rate, year-end (LC/$) | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | |||||||||||||
| Banks' claims on resident non-gov't sector growth | 9.3 | 9.9 | (2.1) | 5.0 | 16.5 | 12.2 | 11.1 | 1.9 | 5.5 | 7.9 | 7.9 | |||||||||||||
| Banks' claims on resident non-gov't sector/GDP | 28.0 | 28.8 | 28.9 | 30.1 | 33.6 | 36.6 | 40.7 | 41.9 | 43.1 | 45.2 | 47.3 | |||||||||||||
| Foreign currency share of claims by banks on residents | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||
| Foreign currency share of residents' bank deposits | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||||||
| Real effective exchange rate growth | 2.2 | 2.9 | 13.6 | 0.1 | (100) | N/A | N/A | N/A | N/A | N/A | N/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 factors | Score | Explanation | ||||
| Institutional assessment | 6 | Political institutions and pillars of macroeconomic stability are still developing. Future macroeconomic policies are difficult to predict. | ||||
| Weak debt payment culture. | ||||||
| Economic assessment | 5 | Based 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 assessment | 5 | Based on narrow net external debt and gross external financing needs/(CAR + usable reserves) as per Selected Indicators in table 1. | ||||
| Fiscal assessment: flexibility and performance | 3 | Based on the change in net general government debt (% of GDP) as per Selected Indicators in table 1. | ||||
| Fiscal assessment: debt burden | 3 | Based 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 assessment | 6 | |||||
| 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 rating | b- | |||||
| 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 currency | CCC- | |||||
| Notches of uplift | 0 | Default risks do not apply differently to foreign- and local-currency debt. | ||||
| Local currency | CCC- | |||||
| S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology. | ||||||
Related Criteria
- Criteria | Governments | Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
- General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
Related Research
- Sovereign Ratings History, March 13, 2020
- Sovereign Ratings List, March 13, 2020
- Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions, March 9, 2020
- Sovereign Ratings Score Snapshot, March 3, 2020
- Banking Industry Country Risk Assessment Update: February 2020, Feb. 21, 2020
- Sovereign Debt 2020: Global Borrowing To Increase To $8.1 Trillion Amid Favorable Financing Conditions, Feb. 20, 2020
- Global Sovereign Rating Trends 2020: Sovereign Debt Buildup Continues, Jan. 29, 2020
- Sovereign Risk Indicators, Dec. 12, 2019 (An interactive version is also available at http://www.spratings.com/sri.)
- Global Sovereign Rating Trends: Midyear 2019, July 25, 2019
- Default, Transition, and Recovery: 2018 Annual Sovereign Default And Rating Transition Study, March 15, 2019
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.
The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').
Ratings List
| Downgraded; CreditWatch/Outlook Action | ||
|---|---|---|
| To | From | |
|
Ecuador |
||
| Sovereign Credit Rating | CCC-/Watch Neg/C | B-/Stable/B |
|
Ecuador |
||
| Senior Unsecured | CCC-/Watch Neg | B- |
| Downgraded | ||
| To | From | |
|
Ecuador |
||
| Transfer & Convertibility Assessment | ||
| Local Currency | CCC- | B- |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Livia Honsel, Mexico City + 52 55 5081 2876; livia.honsel@spglobal.com |
| Secondary Contact: | Carolina Caballero, Buenos Aires (54) 114-891-2118; carolina.caballero@spglobal.com |
| Additional Contact: | Lisa M Schineller, PhD, New York (1) 212-438-7352; lisa.schineller@spglobal.com |
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