Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Republic of Ecuador to 'CCC+' from 'B-' and removed it from CreditWatch with negative implications, where it was placed on April 21, 2005. The outlook on the rating is stable.
"The downgrade reflects concerns about the ability of the government to cover its financing needs over the coming year, given uncertainty about the magnitude of disbursements from multilateral agencies and the willingness of the private sector to roll over locally issued debt," said Standard & Poor's credit analyst Lisa M. Schineller.
Standard & Poor's calculates a central government financing gap on the order of US$400 million for 2005. The gap differs from official assumptions owing not to markedly different estimates about the central government's fiscal out-turn or the accumulation of revenue in the oil stabilization fund (FEIREP), but to more conservative expectations about the availability of official and private-sector funding.
Indeed, the updated official central government fiscal projections that were submitted to Congress along with
proposed legislation to change the fiscal responsibility law (FRL) and the use of FEIREP proceeds differ modestly compared with those of the previous government. "Despite the continued high oil price environment, the government's access to funding and ability to satisfy its borrowing needs are materially weaker now than earlier in 2005," explained Ms. Schineller.
"The changes to the FRL and FEIREP, coupled with conflicting policy signals from the government, have raised the likelihood of curtailed access to official and private sector financing," she added.Standard & Poor's said that clarification on the amount of exceptional financing likely to be forthcoming from the multilaterals for 2005 is not expected until the third quarter.
The time frame depends first on the International Monetary Fund's evaluation of the final, legislated changes to the FRL and FEIREP and the government's budget plan for 2006, followed by funding decisions within the various multilaterals. Lingering uncertainty about access to official financing could limit the appetite of the private sector to roll over locally issued debt; domestic debt maturities are significant in October 2005 (US$260 million) and January 2006 (US$200 million). Against the backdrop of high expenditure rigidity, these issues heighten the risk associated with Ecuador's ability to cover its financing needs over the coming year—a risk that is now consistent with a rating in the 'CCC' category.
"The stable outlook underscores the evenly balanced pressures on the rating and the government's ability and willingness to service its debt," noted Ms. Schineller. "Creditworthiness could improve with consistent policy
signals backed by prudent fiscal performance that, in turn, restore confidence in government policy and improve the outlook for access to financing.
The rating could be downgraded should it become apparent that debt-management capabilities are further impaired, the projected fiscal out-turn weaken, or instability surface in the here-to-date, little-changed level of deposits in the banking system," she concluded.