Ecuador’s Dull Dollarization Dial
Ecuador bonds were up 5 percent on the EMBI through Q3 despite dollarization doubts planted in a new monetary code as S&P raised the sovereign rating to B+ with a stable outlook and the IMF offered muted praise in its first Article IV report in seven years. President Correa has not proposed a dollar alternative but the updated banking framework permits “electronic currency” use as private lenders are subject to stricter mandatory allocation and government oversight. The ratings upgrade was due to a wider funding base after bond market return and “pragmatic” economic policies amid the 2000 voluntary default and high fiscal deficits and oil export reliance. The Fund review cited solid growth and social indicators the past decade but urged relaxation of business and capital controls. The budget deficit will exceed the 5 percent of GDP target this year but the current account is back to surplus on lower imports and a petroleum production increase. International reserves were up 40 percent to $7 billion with renewed Chinese commitments including for hydroelectric projects. The per barrel oil price is off 10 percent versus the first half but non-oil agricultural sales of bananas and shrimp have helped offset the difference. A new field was discovered by Italy’s ENI as multinationals venture back under competitive operating and tax regimes despite the lingering controversy over the Chevron environmental damage case, where the lead New York attorney representing villagers was found guilty of manipulating evidence.
Uruguay is another small index component drawing investor attention as local debt holding period requirements were eased ahead of end-October presidential elections likely to go into the second round with a narrow margin between the leading candidates. The ruling Broad Front representative commands 40 percent in opinion polls, but an opposition victory should keep broad economic policy intact. GDP growth is at 3 percent on good offshore financial services performance with chaos in next-door Argentina compensating for construction decline. Inflation is above the target range at 9 percent and the fiscal gap is again 3 percent of GDP as pre-election spending was added to traditional social transfers. Marijuana legalization was designed to bring in revenue as the experiment is closely watched by South American neighbors. Paraguay’s debut sovereign bond last year has been sporadically tracked as growth levels to 4 percent after 2013’s 15 percent drought recovery. The bumper harvest has faded as the President, a former business tycoon, aims to diversify the economy into mining and services while attacking widespread poverty. A fiscal responsibility law sets a 1.5 percent of GDP ceiling in 2015, and public debt is less than 15 percent of output as further global bonds will go to finance a medium term $15 billion infrastructure program. Domestic borrowing has jumped 15 percent this year as multilateral development bank-supported efforts resume at capital market modernization as an alternative to the Brazilian border informal trade reportedly on the criminal and terrorist money edge.
