Reuters
Venezuela, Ecuador bonds set to lag Andean region
10.22.08, 5:02 PM ET

Ecuador - (Updates bond, oil market levels)

By Hugh Bronstein

BOGOTA (Reuters) - The bonds of Ecuador and Venezuela are set to sharply underperform the debt of Andean neighbors Colombia and Peru as fallout from nervous global markets hits the commodities-dependent region in coming weeks.

While Ecuador and Venezuela have bet their prosperity on high oil prices, Colombia and Peru have diversified exports and done more to open their economies to the foreign direct investment that might protect them in the hard months ahead.

Demand for oil, grains, metals and other commodities from Latin America has slumped due to a global credit clampdown that started a year ago with the U.S. subprime mortgage crisis.

Risky emerging market assets are getting hammered in a flight to safe-haven dollars every time U.S. stocks move lower. But the bonds of Colombia and Peru have retained high investor confidence this month compared with their Andean neighbors.

"Unlike Colombia and Peru, Venezuela and Ecuador seem to have missed the boat in terms of protecting their economies from this downturn," said Camilo Perez, chief economist at Banco de Bogota.

"This is going to be reflected in the bonds of all four countries in the months to come," he said.

Peruvian bond spreads have widened a relatively low 281 basis points during this month's turmoil while the rest of the JP Morgan Emerging Markets Bond Index Plus has shot out 357 basis points, showing a dramatic rise in perceived risk of default measured against safe-haven U.S. Treasury paper.

Colombian bonds have traded even with the index this month while Venezuelan spreads have widened 818 basis points to 1,748. Ecuador's portion of the index has raced out 1,168 basis points to 2,169.

"If global risk appetite diminishes further, you will see even more divergence between Venezuela and Ecuador on one hand and Colombia and Peru on the other," said Bertrand Delgado, senior economist for IDEAglobal, a consultancy in New York.

SAINTLY INTERVENTION?

OPEC members Ecuador and Venezuela have discouraged foreign investment with torrents of anti-capitalist rhetoric and by renegotiating contracts with foreign energy companies in a bid to increase state control over the sector.

Those governments were in a much stronger position in July when oil was over $147 per barrel. It has since dropped to about $67 per barrel.

Ecuadorean President Rafael Correa has threatened to expel foreign oil firms if they do not boost output and asked people to light candles to their favorite saints in the heavily Roman Catholic country and pray for higher oil prices.

It might not be a bad idea as the outlook for petroleum demand remains uncertain amid fear of a world recession.

Venezuela, where President Hugo Chavez has nationalized key industries, depends on oil revenues for almost all of its foreign exchange and close to half of its budget.

But the socialist leader is unlikely to slow spending as he faces a tough November election for governors and mayors.

Peru, the only country in the Andes to enjoy an investment grade credit rating, will be hurt by lower tax revenues from its key mining sector. But the country is running significant budget surpluses that can cushion the blow even if the government starts spending more to prop up economic growth.

Colombia has deficits caused in part by government spending ahead of a possible 2010 campaign by President Alvaro Uribe for a third term. His supporters are trying to change the constitution to allow another run for the popular leader.

A key source of government revenue in Colombia is state oil company Ecopetrol, where profits can be hurt by lower prices.

But the country is benefiting from record foreign direct investment attracted by increased security as the government uses billions of dollars in U.S. aid to push leftist rebels onto the defensive for the first time in decades. (Editing by James Dalgleish)