New Ecuador Risk

Merri and I fell in love with Ecuador long ago, have made a major commitment to this country and are in the process of buying more property there now. However there are some political aspects that are not perfect and I want to share this negativity so you are not unaware.

Stratfor Intelligence Report outlines the problem quite well. The report says that there could be deteriorating relations between President Alfredo Palacio and Washington, points out that the new US Ambassador to Ecuador Jewell is a hard liner. The report says:

“The decline in relations between the Palacio and Bush administrations will continue in the coming months if Jewell presses U.S. demands without offering any carrots — such as financial assistance for Palacio’s government or trade privileges for Ecuadorian exporters who seek better access to the U.S. economy. Tensions already are fairly high: In late June, the U.S. government suspended military aid to Ecuador because Palacio refused to guarantee immunity from international prosecution for U.S. government personnel in Ecuador. And in July, the World Bank — apparently pressured by Washington — refused to disburse a $100 million loan for Ecuador that already had been approved by the bank’s board of directors.”

This seems like standard US policy to bully its friendliest allies but the report shows that there is a competitor now that the US may not understand or appreciate. Here is what I consider the risk.

Stratfor says:

“However, efforts by Venezuelan President Hugo Chavez to build stronger ties with the Palacio government are bearing fruit. Chavez has committed his country to buying $300 million of Ecuadorian government debt in the coming weeks. And during his weekly Hello President television program Aug. 22, Chavez offered to lend to Ecuador, at no interest, the equivalent of 88,300 barrels per day (bpd) of crude oil for a period of at least four months, while Petroecuador repairs extensive damages at wells that were seized last week by protesters in the oil-rich northern provinces of Sucumbios and Orellana.” You can send questions or comments on this article to

Ecuadorians are smart people so they must know that there are strings attached and that Venezuela is in fact fomenting trouble in Ecuador to create oil shortages that would create the needs for such oil loans.

Chavez may be doing this to enhance his influence in Ecuador and gain more oil leverage over the US.

We saw in last week’s message that due to the political developments in Venezuela, Keppler Asset management decided this market is no longer considered investable given his fiduciary responsibility with regard to the safety of the return of the capital entrusted to him by his investors. As a consequence, his analysis, which exclusively focuses on economic and business matters, had become irrelevant due to the recent political developments in Venezuela. Therefore, Venezuela was downgraded from “Buy” to “Neutral” and thus eliminated from Keppler’s Top Value Model Portfolio. In the portfolios entrusted to Keppler Asset Management they were in the process of liquidating all securities domiciled in Venezuela.

To sum this up, I have three concerns. The first is the fact that there are a few very rich and a lot of very poor people in Ecuador. This is an inflammable situation that is leveraged by the added money coming from high prices of oil. This creates enormous opportunity, but also enhances risk.

Second, the current administration in Venezuela is a neighbor who may be fanning the negative aspects of this fire.

Finally, US foreign policy is sometimes misdirected and seems to ignore and even hurt its friends and allies.

I see this combination as a negative change in not just Ecuador, but all of Latin America.

As global investors we must always be alert for change, good or bad. This is especially true now when there is a groundswell of lmost unthinkable economic events taking place. Imagine this.

On September 26, 2005 Fitch Ratings lowered General Motors credit rating further into junk status so it is now rated two levels below investment grade saying that the automaker has made little progress and is vulnerable if gas prices remain high. This means that according to Fitch Ecuador at one level below has a better credit rating than GM

Standard and Poor’s plus Moody’s have also rated GM credit as junk.

Yet a recent Merrill Lynch & Co. mathematical analysis shows the government bonds of Ecuador now offer the highest yield-to-risk ratio for investors. A Merrill report said: “The model suggests that Ecuador, Mexico and Russia remain the cheapest sovereigns.”

Ecuador bonds look especially attractive because its credit rating is CCC (same as GM) but the benchmark Ecuador bonds due in 2012 yield 12.7%.

However not everyone agrees with Merrill Lynch. Thomas Fischer recently wrote:

“SP rating has just put Ecuadorian bonds on their “negative watch list” with a possible downgrading from their current ccc+ to C. Clients should be reminded that they take on a lot of risk – Jyske Bank doesn’t even have Ecuadorian bonds in its Jyske Invest Emerging Market Bond Fund.

Having shared these concerns, Merri and I remain positive about Ecuador. If any of this negativity holds property prices down, this adds extra opportunity.

What we love most is the sweet, peace loving nature of the people. We hope this wonderful asset will carry the people through this current political turmoil and that the increased cash flow from higher oil prices will enhance the peace and prosperity there.

We head to Quito this October to buy more land ourselves (we have already purchased over 800 acres) and enhance our business activity there.

Any disturbances of this sort can reduce Ecuador’s real estate values in the short term, which I view as another time to buy! Until next message, good global investing.