Ecuador’s spat with the U.S. over the fugitive whistleblower Edward Snowden cost exporters special access to the world’s biggest economy and may make the country’s planned bond sale more expensive.
President Rafael Correa, whose government has said it is planning a return to international credit markets for the first time since its $3.2 billion default four years ago, will probably have to offer as much as 9 percent for a 10-year bond to entice investors, according to Michael Henderson, an emerging-markets analyst at Capital Economics in London. That compares with the 6.15 percent yield on similarly rated Dominican Republic dollar bonds due in 2024.
Correa, who plans to issue notes by the first quarter of 2014, sparked the conflict last month when he renounced the country’s preferential trade benefits under a program promoting alternatives to the cocaine trade. He said the U.S. was trying to use trade privileges as leverage to force Ecuador to extradite Snowden if he reaches the country seeking asylum. While Snowden has since asked more than 20 countries for refuge, Correa’s trade decision is a warning to potential creditors that the country is still a volatile place to invest, Henderson said.
“It’s not so much the fact of how that’s going to affect the trade balance in the near term, it’s more the signal that it sends out,” Henderson said in a July 11 telephone interview. “This latest situation isn’t going to do anything to improve confidence in Ecuador’s faith in honoring its contracts, so certainly yields will adjust to reflect that.”
While higher prices for the OPEC nation’s oil and last week’s announcement of a loan of as much as $1.4 billion from China have helped limit losses in Ecuador’s dollar bonds due in 2015, the dispute with the U.S. shows the risk of investing in the Andean country, Henderson said.
Yields on Ecuador’s dollar bonds maturing in 2015 fell two basis points, or 0.02 percentage point, to 7.91 percent at 3:30 p.m. in New York after climbing 35 basis points in the second quarter, according data compiled by Bloomberg. They tumbled 123 basis points in the first three months of the year as the price of crude oil climbed 5.9 percent, buoying Ecuador, a member of the Organization of Petroleum Exporting Countries.
The Andean nation is rated B by Standard & Poor’s, five levels below investment grade, while the Dominican Republic is one step higher at B+.
U.S. Treasury 10-year note yields rose earlier this month to 2.74 percent, the highest level since August 2011, on concern the Federal Reserve will curtail securities purchases that have buoyed demand for emerging-market assets.
Snowden, who originally asked Ecuador for asylum, has been stuck in a Moscow airport since June 23 after the U.S. revoked his passport, preventing him from traveling. He asked Russian authorities to let him stay there last week, saying the U.S. and its European allies are blocking him from reaching Latin America, according to a statement posted on the website of the anti-secrecy group WikiLeaks.
Ecuador’s Foreign Trade Minister Francisco Rivadeneira didn’t respond to an e-mailed request for comment on the trade preferences. The U.S. program, known as the Andean Trade Promotion and Drug Eradication Act, or ATPDEA, was enacted to combat cocaine production in the Andes through incentives for farmers to stop growing coca.
The loss of the benefits “would result in a significant reduction in exports to the United States, affecting these major industries that support Ecuador’s economic growth and more than 320,000 jobs in the country,” the nation’s embassy in Washington said in a report last year. The total impact on jobs is “difficult to quantify” and will hit lower-income workers the most, according to the report.
The decision to reject the program of trade preferences “was made to ensure that any potential review of Mr. Snowden’s asylum application was not tainted in any way by political calculations,” Nathalie Cely, Ecuador’s ambassador to the U.S., said in a July 11 e-mailed response to questions from Bloomberg News.
The government has announced plans to provide exporters with about $23 million in tax credits, the amount it says producers will lose without the program.
Ecuador shipped about $547 million of goods to the U.S., including fresh-cut flowers, broccoli and canned tuna, under ATPDEA and the U.S. Generalized System of Preferences, known as GSP, last year, according to Daniel Legarda, the executive vice president of the Ecuadorean Exporters Federation. Both programs are now “at risk,” he said.
Correa said in a June 27 speech he wasn’t “the least bit concerned” and told exporters to “take a valium.”
“Ecuador doesn’t accept pressure or threats from anyone and doesn’t barter its principles and sovereignty or submit to mercantile interests,” Correa said.
Correa’s announcement came a day after U.S. Senator Robert Menendez, the New Jersey Democrat who is chairman of the Senate Foreign Relations Committee, said he would lead the effort to block renewal of trade preferences for Ecuador if it granted Snowden asylum.
While the conflict has hurt Ecuador’s international image, it’s not irreparable, Pablo Davila, executive president of Ecuador’s Chamber of Industries and Production, said in a July 11 interview at his office in Quito.
“The decision that our government took had bigger consequences than originally calculated,” Davila said. “We’re going to be able to mitigate this, but once again we’re trying to overcome the moment.”
Correa, who called bond investors “true monsters” when he announced the default in 2008, will also need to resolve a conflict with holdout creditors who rejected terms of the country’s debt swap four years ago, Capital Economics’s Henderson said.
In March, the government said Ecuador may offer a buyback and wouldn’t pay more than in 2009, when it purchased more than 90 percent of defaulted debt at 35 cents on the dollar.
“Ecuador was always seen as quite a risky place to do business, and this situation with Snowden hasn’t done much to improve it,” Henderson said.