Ecuador delayed its slated bond swap early this month, citing poor market conditions. But domestic political factors may complicate the markets for the Andean nation, analysts suggest. The intention of the swap is to reduce coupon payments on a portion of the foreign debt, which totals 60% of GDP.
Ecuador is in a somewhat paradoxical situation because high oil prices are bolstering the economy, creating a bright array of macroeconomic indicators and a rosy outlook, while the political scene is gloomy. The economy grew by 6.6% in 2004 and is projected to grow by 5.5% this year. The country is unusual in that it is running a primary surplus of 5.5% of GDP and an overall surplus of 2% of GDP.
At the conclusion of his February visit to Ecuador, IMF managing director Rodrigo Rato commended the country's authorities for high growth, inflation at international levels, improving fiscal accounts and a downward trend in public debt. The economic programme for 2005 "aims at maintaining solid real economic growth and low inflation, while preserving fiscal discipline and making progress toward fiscal sustainability", Rato said. The government must develop a consensus to secure support for President Gutierrez's planned reforms in the oil, electricity and financial sectors, and in social security and civil service, Rato added.
Oil profits are being invested in the stabilization fund, an instrument of counter-cyclical policy. "It is very positive that they are saving the oil windfall, it is the first time this is happening in Ecuadorean history," Guillermo Perry, economist for the Latin American and Caribbean region at the World Bank, tells Emerging Markets.
On the political front, Gutierrez has faced deepening opposition ever since the Supreme Court was packed with presidential supporters late last year. Congress is divided and strong indigenous movements oppose the dollarization regime.
Uncertainty was added when former president Abdala Bucaram was allowed back into the country in early April, in an attempt to boost support for Gutierrez. Bucaram, who calls himself "Loco", was driven out of office 1997 after only six months in the presidency, by a vote of Congress that charged him with mental incapacity.
Bucaram commands a solid base of support of about 25% of the population and has said he will lead a populist movement taking as a model President Hugo Chavez of Venezuela.
"The political situation in Ecuador is deteriorating," says Walter Molano, managing partner at BCP Securities in Connecticut. "The credit indicators are not that alarming, considering the oil price is high and the overvalued exchange rate makes indicators look better because it inflates the GDP."