UPDATE 1-Moody's raises Ecuador to Caa1, outlook stable
* Moody's cites capacity to secure internal financing
* China has become Ecuador's main lender in recent years
* Country forecast to grow 4.8 pct in 2012 (Adds details, background)
By Luciana Lopez and Eduardo Garcia
NEW YORK/QUITO, Sept 13 (Reuters) - Moody's Investors Service on Thursday raised Ecuador's long-term government bond rating to Caa1 from Caa2 with a stable outlook, keeping the default-prone Andean country deep in junk bond territory but noting its improved ability to find financing.
About half of sovereigns rated Caa1 end up defaulting, as OPEC-member Ecuador did in the late 1990s and 2008.
Its new rating is in line with the ones Moody's gives to Pakistan and Cuba. Neighboring Colombia has meanwhile joined other Latin American countries such as Peru, Brazil and Chile as a high-, or investment-grade, credit.
Moody's based the upgrade in part on "the government's capacity to secure access to new external financing (e.g., China) in the wake of its 2008 default," the agency said.
"The rating outlook remains stable to reflect a balance between key credit strengths and challenges for Ecuador's credit profile," it said in a statement.
The upgrade by Moody's was the second for the OPEC-member country so far this year. The good health of the economy led Standard & Poor's to upgrade Ecuador's long-term sovereign debt rating to B from B-minus in early June.
Fitch rates the country B-minus, also with a stable outlook.
Ecuador locked itself out of debt markets by defaulting on $3.2 billion in global bonds nearly four years ago, but Moody's noted that the country has continued to service all of its debt since then.
Following the default Ecuador has met its funding needs with bilateral credit deals, mostly from China.
Last year, the government signed a $2 billion credit deal with China and a pact for a $571 million loan with a Chinese bank. In November, President Rafael Correa said his government was in talks with a Chinese bank for a loan worth $1.7 billion.
Ecuador also secured a loan worth $515 million in July from the Latin American Reserve Fund to prop up its balance of payments amid lower oil export revenues.
The central bank lowered its 2012 growth forecast to 4.8 percent from 5.4 percent previously after posting slower than-expected growth in the first quarter, in part due to lower oil revenues. However, the prices paid for Ecuadorean crude have picked up in recent weeks.
OIL REVENUES, CONSTRUCTION
The Correa government has failed to diversify its economy away from its dependence on oil exports and the country could suffer badly if crude prices fall again.
Higher oil export revenues together with increased tax collection have allowed the government to ramp up spending on welfare and infrastructure in recent years, which has had a positive effect on economic growth.
Ecuador's economy grew 7.8 percent in 2011, more than double the 2010 growth rate. The economy expanded 3.6 percent in 2010 and 0.4 percent in 2009.
The government has vowed to continue spending heavily to spur growth as it heads toward a presidential election scheduled for February 2013. Correa is expected to run for re-election, but has yet to make an official announcement.
Finance minister Patricio Rivera told Reuters last month that he sees more than 4 percent growth in 2013 and that the expansion will be driven by the construction sector. (Additional reporting by Tiziana Barghini in New York and Hugh Bronstein in Caracas)
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