Moody's upgrades Ecuador on oil prospects

Moody's yesterday upgraded Ecuador from Caa3 to Caa2 on the back of improved oil production prospects following the signing of new oil contracts with foreign companies. Expectations that the government will continue to secure sufficient external funds to finance its fiscal deficit also underpinned the upgrade.

Ecuador has continued to secure external funding despite fears the country would be unable to finance its deficit after defaulting on its Ecuador global 2012 and global 2030 bonds at the end of 2008. Ecuador has received financial support from China, the Andean Development Corporation (CAF) and the Inter-American Development Bank (IDB) and has also accessed local funding from the Ecuadorian Social Security Institute to cover most of its funding needs. Moody's also highlights efforts to reengage the World Bank and IMF which could see Ecuador tapping the international capital markets for the first time since 2005, providing an extra avenue to secure funds to finance the government deficit.

Ecuador has committed to honour its $650 million 2015 global bond, the only one of its bonds it did not declare illegitimate, with the annual coupons on the bond amounting to $60 million, which does not place a large burden on the state.

New agreements reached with foreign oil companies, if honoured, could see oil production and investment increase, after a fall of 5% since 2008. The oil sector represents around 15% of Ecuador's GDP and 50% of its exports, says Moody's.