NEW YORK, March 26 (Reuters) - Merrill Lynch on Monday increased Ecuador allocations in its model portfolio from market weight to overweight because of reduced risks of default in the short term.
Merrill Lynch also said the increase in exposure to Ecuador also allows accommodation of a cut in Venezuela allocations from overweight to market weight.
“Investors continue to believe Ecuadorean bonds carry high political risk, nearly three times as high as during the Alfredo Palacio administration, which we consider somewhat exaggerated -- following the recent declarations and actions by the President Rafael Correa administration,” the bank said in a research note.
Ecuadorean bonds have undergone a period of extreme volatility due to Correa’s pledges to restructure the country’s external debt, which he considers illegitimate, too large and expensive to service.
However, in the past two months, the Correa administration has been moving away from default statements and has allocated in the budget the full amount needed to service external debt.
Correa has paid, on time, the coupon of the Ecuador bond due in 2030, said that Ecuador would not seek debt forgiveness from multilateral lenders, and indicated the Argentine model may not be the one to follow, despite stating the contrary during his campaign, the note said.
Merrill also cut Venezuela allocations as a result of the upcoming issuance of $5 billion in three classes of bonds by Petroleos de Venezuela S.A. (PDVSA).
“While not perfect substitutes to the sovereign bonds, we believe this new issuance will affect the sovereign curve, as buyers of PDVSA bonds will likely try to raise actual dollars by selling some of these to the Street,” the bank said.
It added that the PDVSA debt will compete with other sovereign debt assets as PDVSA has increasingly merged with the rest of the government.
“The technical picture could be negatively impacted by the massive supply of PDVSA paper announced, which implies a 30 percent increase of the outstanding Venezuelan bonded debt in dollars. Therefore, we cut Venezuela from Overweight to Market Weight.”