Last week, the Bloomberg agency announced that the Ecuadorian bonds, the Global 15, improved more than any other title in 66 developing countries. “With a yield of 7.64%, the USD 650 million in promissory notes of Ecuador yields 2.76 percentage points more than the average emerging market debt that JP Morgan follows, “the agency said.
He added that “investors with fixed income, which find interest rates close to zero in the US, are turning to Ecuador to increase returns.” Doors inside, who closely follow the fluctuations of government bonds in international markets explain why this unusual interest in paper. Is this increase referred to by Bloomberg extraordinary or is it a very normal fluctuation in the markets?
Bond yields have a lot to do with risk. The more likely a country is to pay its debt, the lower the yield. The higher the risk, the greater the expected profit. If I am going to invest in Ecuador, I will ask for a higher return than if I invest in the US, for example. What has happened with Ecuador is that, due to the high price of oil, the increase in tax collection and because it has been complying with the payments of the Global 15, people trust or expect to be paid without any problem until their expiration.
The message for the market is that Ecuador is a safer country than before, therefore it will attract investors who do not expect too high a return. Why is Ecuador at the top of those 66 emerging countries that maintain state roles in the markets? Ecuador is at the top in the sense that the price has increased. A few years ago it was a country with a lot of risk, so the expected return was very high.
Ecuador gave yields of 12 or 14%, while Colombia, Chile gave 4 or 5%. The people who bought those bonds with a yield of 14% have won a lot, but since now Ecuador is perceived as a lower risk country than before, then the price of the bonds goes up. When the price goes up, the return is inverse. Additionally, Ecuador has been paying for a coupon that is 9.375% and has already passed the nominal value.
Then, before, at 100%, that coupon gave a yield of 9.375%; Today, as people are already willing to invest, with a lower yield, the price of the Ecuadorian bond rises to around USD 102. So, whoever invested in Ecuador has had a much better return than the one who did it in Chile, Peru, etc. ., because the bonds in those countries are already stable.
In the Ecuadorian case, they vary a lot. Those who took the risk of buying Ecuadorian bonds won with the price increase plus the coupon as yield. Why do investors react positively, if the memory of non-payment of Global 12 and 30 is still fresh? There are several factors. One, that Ecuador has continued paying the Global 15 and some Brady bonds that were left over. Two, the price of oil is very high. Three, the collection of taxes has been important. Four, the economy is growing. Five, during this Government there have been no expropriations as happened in Venezuela.
Then, people think that at this moment Ecuador does not want to pay the Global 15 and has greater confidence. Besides, it is seen that Ecuador is in need of returning to the markets because it is very dependent on the loans with China, which are expensive and have a collateral that is oil. Precisely, is the relationship with China, and especially the anticipated delivery of oil, enough risk for investors to react negatively?
Yes. Now it is seen as something unnecessary, as much is being paid to China and, above, is being given a collateral, which means there is not much risk for China. If Ecuador does not pay, then they would have the right to confiscate the oil anywhere in the world. Is it a good time now to go out to international markets with an issue, as the government has been speculating in recent weeks?
Yes, there is a lot of money in the world. Because with the situation in Europe and the US, central banks have issued a lot of money. And that has contributed to the rise of the stock market and the increase of Ecuadorian and other emerging bonds. What would be the parameters for issuing a debt bond at this time?
Ecuador could come out with a performance (depending on who you advise) of between 7 and 10%. And if you bet on an issue with oil collateral, maybe the yield would be cheaper than the indebtedness with China.
I could leave quietly with USD 500 million to try, you have to leave little by little. Ecuador is doing a good job in improving its risk rating and that would help even the performance.
Article originally published by https://www.revistalideres.ec/lideres/ramiro-crespo-inversor-ve-ecuador.html