Fitch Ratings, the international credit rating agency, has revised the outlook on Ecuador's sovereign ratings to negative from stable. The long-term foreign currency rating is affirmed at 'B-' and the country ceiling is affirmed at 'B-'. The short-term foreign currency rating is likewise affirmed at 'B'.
Sovereign credit risk has increased recently on greater political instability and concerns about related fiscal pressures. Changes to laws governing the FEIREP oil stabilization fund and the 'Fondo de Reservas' social security program have effectively reduced the pool of local financing available to the government. The oil production interruption that began in mid-August has left public finances more vulnerable to a decline in oil prices and to spending increases.
According to Fitch senior director and lead Ecuador sovereign analyst, Morgan Harting, 'there is a plausible 'muddle through' scenario in which Ecuador will be able cover its roughly US$3 billion in financing needs through end-2006, but this will require reasonable fiscal performance underpinned by oil revenues, the availability of financing from multilateral lenders and other governments, and relative stability in the financial system and capital account.' Risks to the credit over this period include potential spending pressures related to next year's election and higher scheduled bond debt service in 2006. Harting stated that 'these risks will all be more difficult to mitigate in light of the current uncertainty about Ecuadoran politics.'
The issuer rating could be downgraded in the event that oil production is not fully restored quickly, that fiscal performance suffers, that the 2006 budget threatens debt service, or that actual disbursements from official creditors are below estimates. The rating could stabilize if the oil production interruption proves transitory, if adequate financing is secured from bilateral and multilateral sources, and if appears feasible that government balances will be held in check.