| By
Gary Scott
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 analysis@stratfor.com.
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.
Gary
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