Ecuador Plans Bond Sale to Test Market Demand After Default

Ecuador plans to sell international bonds this year or next to test the appetite for the country’s notes for the first time since defaulting on $3.2 billion of debt in 2008 and 2009, President Rafael Correa said.

The government has a “pilot plan” to sell debt, in what would be the first international sale since 2005, and will use the money to finance public works projects next year, Correa told reporters in Quito yesterday, without providing more details. This year’s budget needs are “covered,” he said.

“There is a pilot plan to sell international bonds, I’m not sure if it will be ready this year or next,” Correa said at a meeting with the nation’s foreign press association. “We’ll see how we do and if we do well, then good, and if we do bad, we’ll continue as we are now.”

Ecuador, the Organization of Petroleum Exporting Countries’ smallest member, has tapped its public pension fund and relied on Chinese loans to help finance its budget since the default. The loans from China and windfall oil revenue are reassuring investors that South America’s seventh-biggest economy will keep servicing its debt, Richard Francis, an analyst at Standard & Poor’s in New York, said in a June 24 interview.

The timing of the bond sale depends on market conditions, Finance Minister Patricio Rivera told reporters after the meeting.

“Right now we have the necessary liquidity and there are no immediate plans,” Rivera said. “It’s an option, as the president said, but it isn’t the most important option.”

Growth Forecast

The Finance Ministry yesterday lowered its 2012 forecast for economic growth to 4.2 percent from an earlier 5.17 percent. Gross domestic product will slow next year as planned repairs to the nation’s biggest refinery cut output and boost fuel imports, Rivera said.

Ecuador’s bonds are rewarding investors with the best performance in Latin America, returning 15 percent this year as of yesterday, compared with 9.9 percent for Latin American sovereigns on average, according to JPMorgan Chase & Co.

Yields on the nation’s bonds due 2015, the only foreign debt the government kept servicing after the default, fell 260 basis points, or 2.60 percentage points, this year through yesterday to 9.37 percent. Similar maturity Brazilian bonds yield 1.66 percent, down 120 basis points from the end of December, according to prices compiled by Bloomberg.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries widened six basis points, or 0.06 percentage point, to 795 basis points as of 11:02 a.m. New York time, according to JPMorgan’s EMBI+ index. Ecuador’s spread has narrowed 1.18 percentage point this year, according to JPMorgan.

Ecuadorean government debt is the second-riskiest after Venezuela’s among 15 emerging markets tracked by JPMorgan.

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