OREANDA-NEWS. October 07, 2015. Fitch Ratings has affirmed Ecuador's long-term foreign currency Issuer Default Rating (IDR) at 'B'. The issue ratings on Ecuador's senior unsecured foreign currency bonds are also affirmed at 'B'. The Rating Outlook on the long-term IDR is Stable. The Country Ceiling is affirmed at 'B' and the short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS

Ecuador's ratings are supported by its high per capita income, improved governance and social indicators, moderate public debt burden, favourable composition of public spending and increased external financing sources. Nonetheless, high commodity dependence, limited external liquidity, a weak business environment and a poor debt repayment record constrain the sovereign's credit profile.

The authorities' policy response to the decline in global oil prices demonstrates their commitment to dollarization, a monetary regime that has delivered macroeconomic and financial stability since 2000. The expected stabilization of export receipts and potential access to bond markets and official lending mitigate external financing risks in 2015-2017.

Fitch expects the central government deficit to narrow to 4.4% of GDP in 2015 and fiscal consolidation to continue in line with available external financing in 2016-2017. The authorities announced cuts of 24% (7.6% of GDP) to the 2015 expenditure budget to accommodate an expected decline of 48% in oil revenue (4.7% of GDP). The adjustment is proceeding through lower transfers to state oil companies and local governments, a halt to new infrastructure projects and savings on fuel subsidies.

Tightening financing impose fiscal restraint. Ecuador has demonstrated international market access and secured multi-year budget and project financing from China and multilaterals. However, Ecuador presently has limited room to further increase advancements from oil forward sales to China and Thailand. The accumulation of arrears could also reduce the availability of credit lines from private service providers in the oil industry. While yields on global bond benchmarks have surged in the second half of 2015 (2H15), the authorities have indicated that they will use bilateral disbursements and deposits at the central bank to repay its next USD650 million bond maturity in December 2015.

Ecuador's public debt doubled since 2009 and could approach 37% of GDP by 2017, driven by moderate primary fiscal deficits and decelerating growth. This level is well below the 'B' median of 51%, but is approaching the legal ceiling of 40% of GDP. The sovereign's capacity to tolerate a higher debt burden is constrained by its vulnerability to oil revenue shocks, exposure to swings in external financing conditions and weak debt repayment record.

Fitch has revised down Ecuador's growth forecast to 0.4% in 2015 and 1.4% in 2016-2017 to incorporate lower oil price assumptions and the knock-on effects of the fiscal adjustment. Lower investment, a strong U.S. dollar and the partial closure of the Esmeraldas refinery for upgrading work have been the main drags on output since 2014. Drying U.S. dollar liquidity, subdued consumer confidence and receding oil production pose challenges to a faster economic recovery. The government introduced incentives to the mining investment regime and a new public-private partnerships law to crowd in private investment, but these policies might only yield benefits beyond 2017.

Ecuador's external solvency and liquidity indicators are weakening. Fitch expects the country to become a moderate net external debtor in 2015, driven by sovereign borrowing and a reduction in the banks' net foreign asset position to boost liquidity as deposits have declined. Import compression through temporary tariff hikes could only partially offset an expected 6% of GDP loss in oil exports in 2015. As a result, the current account deficit could widen to 4% of GDP and international reserves could fall to USD3 billion in 2015 from USD4 billion in 2014.

High commodity dependence represents a credit weakness, rendering growth, fiscal and external accounts vulnerable to oil supply shortages and terms of trade shocks. The government's broad popular support and two-third legislative majority has facilitated the implementation of the fiscal adjustment, but social discontent is rising as the economic downturn intensifies and the country gears up for the next general elections in February 2017.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that individually, or collectively, could trigger a rating action are:

Negative:
--Financing constraints or failure to adjust external accounts in an environment of low oil prices;
--Political or social unrest that aggravates Ecuador's economic weakness or limits the space for fiscal adjustment.
--Policies that undermine the sustainability of the dollarization regime.

Positive:
--Renewed growth momentum, for example driven by higher levels of investment in the oil sector, productivity-enhancing reforms and improvements in the business environment;
--A longer track record of servicing external debt and implementing policy adjustments to preserve fiscal sustainability;
--Improvements in the economy's external liquidity position relative to peers.

KEY ASSUMPTIONS

The ratings and outlook are sensitive to a number of assumptions:

--The growth, fiscal and external forecasts assume that oil production could fall 5% from its present levels (548,000mbpd) in 2015-2016 due to investment cutbacks to state oil enterprises. Fitch's latest projections point to a recovery in oil Brent prices to USD60pb in 2016 and USD70pb in 2017;

--Fitch assumes that the government of Ecuador will pay its USD650 million global bond maturity in Dec. 15, 2015.