October 18, 2013 / 6:40 PM / in 4 years

Fitch Upgrades Ecuador to 'B'; Outlook Stable

NEW YORK, October 18 (Fitch) Fitch Ratings has upgraded Ecuador's long-term foreign Issuer Default Ratings (IDR) to 'B' from 'B-'. The Rating Outlook has been revised to Stable from Positive. Fitch has affirmed the country's short-term foreign currency IDR at 'B'. Fitch has also upgraded the Country Ceiling to 'B' from 'B-'. KEY RATING DRIVERS Ecuador's upgrade reflects the country's continued healthy growth performance, monetary and financial stability underpinned by dollarization and a steady easing of external and fiscal financing risks as a result of still favorable international oil prices, improved prospects in the oil sector and continued availability of bilateral financing from China and multilaterals. Fitch forecasts that growth could reach 3.8% in 2013 and 4.2% in 2014-2015, broadly in line with rating peers. Public expenditure, especially investment, is likely to remain as the driver of growth over the forecast period. Oil production has recovered and is likely to increase over the forecast period underpinned by development of mature fields through enhanced recovery. Moreover, the government is expected to move forward with the development of Yasuni-ITT, which could further increase oil production over the medium term. Nevertheless, Ecuador still faces challenges to significantly increase private investment in the oil and mining sector. Fiscal financing risks appear manageable for the next two years. Although fiscal deficit could deteriorate to 2.8% of GDP during 2013-15, Fitch does not anticipate financing problems due to access of the country to Chinese loans and multilateral funding. Ecuador has precautionary credit lines with China in the event of external shocks. The World Bank might resume funding for certain projects. The government may also explore the option of re-tapping international capital markets although the timeline of this remains uncertain. Near-term risks to the sustainability of dollarization are low due to continued availability of U.S. dollar liquidity, and a stable, albeit less profitable, financial system. Nevertheless, the regime still faces risks to its long-term sustainability due to the combination of fast paced fiscal expansion and limited sources of external financing. Ecuador's creditworthiness balances the sovereign's relatively strong fiscal and external solvency ratios and high GDP per capita in relation to peers against key credit weaknesses such as a weak record of debt service, high commodity dependence and limited sources of financing for the sovereign and the economy. While government debt, forecast at 24.8% of GDP in 2014, remains low relative to peers and below the country's constitutional debt ceiling of 40% of GDP, the local bond market is shallow and heavily reliant on intra-public sector holdings. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. The main factors that individually, or collectively, could trigger a positive rating action include: --Increased growth momentum underpinned by higher levels of investment in Ecuador's commodity sectors. --Increased availability of external and fiscal financing sources and establishment of a longer track record of servicing external debt. The main factors that individually, or collectively, could trigger a negative rating action include: --Fiscal deterioration and sustained reduction in international oil prices that lead to material weakening of the sovereign's external and fiscal credit metrics. --Emergence of financing constraints and signs of erosion in the sovereign's willingness to service debt. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: --Fitch assumes that international oil prices will remain stable at close to USD100 Brent over the forecast period. --Fitch assumes that bilateral financing from China through loans and investment will continue to be available to Ecuador over the forecast period. --Fitch assumes that dollarization will continue to underpin broad monetary and financial stability in Ecuador. Contact: Primary Analyst Erich Arispe Director +1-212-908-9165 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Cesar Arias Associate Director +1-212-908-0358 Committee Chairperson Shelly Shetty Senior Director +1-212-908-0324 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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