Correa Opens Door to Bond `Monsters' He Shunned as Ecuador Seeks Expansion

Ecuador’s President Rafael Correa, who in 2008 called bondholders “true monsters,” is reviewing proposals from banks to sell bonds and is seeking to lure private investors to finance infrastructure and energy.

Correa, speaking at the Bloomberg Ecuador Summit in Quito yesterday, said the Andean nation is the most stable politically it has been since 1996 and is ready to seek “responsible” private investment to boost economic growth above the government’s 5.1 percent forecast for this year. The government is listening to proposals from banks interested in helping the country sell debt to cover financing needs, Finance Minister Patricio Rivera said.

“We know perfectly well that Ecuador needs local and foreign investment to develop, but this must be done in a way so it benefits the country,” Correa, 47, said at the summit. “We welcome private investment. Ask any foreign investor if he lost money here.”

Under Correa, Ecuador defaulted on $3.2 billion of bonds and required oil companies including Spain’s Repsol YPF SA (REP) and Italy’s Eni SpA (ENI) to renegotiate contracts as part of his “21st century socialist” agenda. He said yesterday that the South American country has a “sincere interest” in attracting investors to help finance more than $7.5 billion in infrastructure, tourism and energy projects.

Bond Performance

Yields on Ecuador’s only international bond have declined to the lowest level since the debt default two years ago as a rally in crude, the nation’s biggest export, eases concern over the government’s 121 percent increase in public spending since 2006.

Ecuador’s 9.375 percent bonds due in 2015 is the highest returning bond among developing nations tracked in JPMorgan Chase & Co.’s EMBI - Global Diversified index. In 2011, the securities gained 5.2 cents on the dollar to 95.71 cents, reducing the yield by 1.44 percentage point to 10.53 percent, according to Bloomberg data.

Ecuador, whose Caa2 credit rating by Moody’s Investors Service is two levels below Argentina and Belize, is rebounding from its slowest economic growth in a decade as oil surges to about $100 a barrel and agriculture and manufacturing expand. The economy expanded about 0.4 percent in 2009 and 3.7 percent in 2010.

Reduce Poverty

Correa, a former economics professor and ally of Venezuelan President Hugo Chavez, took office in 2007 promising to reduce poverty in a nation where about 40 percent of people can’t meet basic needs, according to the United Nations. As part of that effort, in September 2008 he rewrote the constitution to increase state control over oil and mining and eliminated the central bank’s autonomy.

Three months later, Correa called bondholders “true monsters who won’t hesitate to crush the country” and later said he had “rebelled against the system that established odious, unfair, illegal, immoral debts.” In June 2009 the government bought back 91 percent of its defaulted bonds due in 2012 and 2030, offering investors 35 cents on the dollar.

In a constitutional referendum scheduled for May 7, Correa’s third, he proposes stripping the judiciary of its independence for 18 months to improve crime fighting while banning financial and media companies from owning companies outside their industry to limit potential conflicts of interest.

‘Socialist Bogeyman’

“There have been winds of change and that always brings fear at the beginning,” Santiago Peralta, founder of Pacari Chocolates, said at the summit when asked about the policies brought by Correa. “Socialism was the bogeyman, and now he’s gone. But there’s still a lot to be done.”

Correa has boosted infrastructure spending on highways, airports, and the nation’s energy grids to 8.7 percent of gross domestic product from 3.2 percent in 2006 in an attempt to spur productivity, according to a government statement.

The percent of children studying and not working climbed to about 86 percent last year from 77 percent in 2006, the year before he took office, Correa said.

Ecuador will invest $4.7 billion in public works this year on items including the construction of a $1.68 billion, 1,500- megawatt dam in the country’s Amazon region, according to the Finance Ministry.

“You can perceive our sincere interest in bringing the economy closer to new investment and find the path to mutual benefit,” Correa said.

May Raise Estimate

The government may raise its 5.1 percent growth forecast for this year if oil prices remain high, Finance Minister Patricio Rivera said at the summit. The country isn’t benefiting enough from higher oil prices and a weak dollar, economists including former finance minister Mauricio Yepez said.

“The lack of growth in the Ecuadorean economy, given the level of revenue we have, is the result of the government’s economic model,” said Yepez, who is now regional vice president of Banco de Guayaquil SA. “The government mainly follows the idea that the state is the motor that drives the economy.”

Consorcio Nobis, an Ecuadorean agricultural and energy holding company, said it plans to invest $200 million to produce ethanol in Peru or Costa Rica to take advantage of free-trade agreements those countries have with the U.S.

Ecuador doesn’t yet have a strictly defined path as far as free trade is concerned,” Chief Executive Officer Roberto Dunn said in an interview at yesterday’s summit. “We won’t be competitive with the world if we build the plant here.”

Ecuador sees “enormous potential” in further developing trade with the U.S. and is seeking a bilateral agreement following the expiration of a preferencial trade accord, known at ATPDEA, Deputy Trade Minister Francisco Rivadeneira said yesterday.

The government is considering deepening the Manta port, on Ecuador’s Pacific coast, to 24 meters from 18 meters to better connect Latin America with Asian markets, Correa said.

‘Open to Investment’

Companies including Portec and Brazil’s Bertolini Group are studying concessions there, and Spanish investors are seeking airport cargo operating concessions, Production Minister Nathalie Cely said.

“Infrastructure investment is fundamental for our exports to be able to compete,” Cely said at the summit. “At least seven companies have shown interest in port and airport concessions.”

Public capital expenditures will represent 13 percent of gross domestic product this year, up from 12 percent last year, Correa said. Spending on social programs increased to 8.2 percent of gross domestic product last year from 4.7 percent in 2006, he said.

“Ecuador is a country open to investment, with clear and stable rules,” said Correa. “We have everything an investor looks for: an honest government, clear rules of play and extremely profitable projects.”

To contact the reporters on this story: Helen Murphy in Quito News at hmurphy1@bloomberg.net; Alexander Emery in Quito News at aemery1@bloomberg.net; Nathan Gill in Quito News at ngill4@bloomberg.net

To contact the editor responsible for this story: Bill Faries at wfaries@bloomberg.net

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