A N A L Y T I C A I N V E S T M E N T S

W E E K L Y R E P O R T @ A N A L Y T I C A I N V E S T M E N T S . C O M

W W W . A N A L Y T I C A . C O M . E C

For the week of September 24– September 28, 2012

Business Amid Populism

The Andean Finance Corporation – better

known by its Spanish acronym CAF – can look

back at a trajectory of more than 40 years that, in

major aspects, offers a stark contrast to the lack of

institutional consolidation in much of public policy

among its very members. The bank enjoys an AAA

credit rating from ratings agency Moodys even as

several of its principal clients have succumbed to

an authoritarian populism that despises any hint of

independent institutions. Headquartered in

Altamira, an upper-middle class neighborhood in

Caracas, it has grown amidst the careless

spending binge that has characterized Venezuela

and Ecuador in particular, even as the potential

rival Banco del Sur project continues to endure a

long, unpleasant gestation period.

Starting out in 1968 as an Andean regional

development bank, as of last year, it has spread to

18 countries, including Portugal and Spain. Overall,

it has registered a fast growth of approved loans,

assets, and portfolio (see chart 1). In 1990, it was a

distant third among multilateral lenders to the

region, accounting for 8% of loans. As of 2011,

Ecuadorian Global Bonds (September 28 2012)

BID ASK

Global 2012 33.00 48.31

Global 2015 102.66 104.56

Global 2030 28.13 32.13

BCE International Reserves Inflation In million US$

Feb2012 3375.54 14.13%

Apr 2012 3787.39 12.20%

June 2012 3930.92 3.79%

Aug 2012 4218,81 7.32%

21 Sep 2012 5213.52 23.58%

Banks – Short and long term Deposits In million US$

Ecuadorian Oil Export Prices (US$ per barrel)

$106.19

$103.33

$97.70

$87.93

$94.16$91.76

$112.49$113.75

$104.16

$87.32$90.27

$98.22

$112.38

$109.15 $97.08

$82.57

$87.73

$91.14

60

70

80

90

100

110

120

March April May June July 28-Sep

WTI

Oriente

Napo

August 2012 0.29%

Year to Date 2.67%

Year on Year 4.88%

March 2012 11068.6 1.82%

April 2012 11263.9 1.76%

May 2012 11424.3 1.42%

June 2012 11571.7 1.29%

July 2012 11517.7 -0.46%

ECUADOR WEEKLY REPORT®

ECONOMIC INDICATORS

Ramiro Crespo

Chairman of the Editorial Board

it grew to become the second largest lender

behind the Inter American Development Bank,

accounting for 39% of loans, while the World Bank

has fallen back to number three (see chart 2). Net

profit has not quite kept pace, but it remains

profitable and with an investment-grade credit

rating. The top three borrowers are Venezuela,

Peru, and Ecuador, with Argentina and Colombia

close behind, followed by Bolivia.

Together, Argentina, Ecuador, and Venezuela –

the countries with the highest credit risk in Latin

America – account for close to half of the CAF’s

loan portfolio. In Ecuador, half of new highways

have some form of CAF funding, totaling $648

million. But growth has helped counter the risk from

these perceived risky borrowers. While loans to

Ecuador have increased in absolute terms under

the present administration, in relative terms, CAF’s

exposure to the country has dropped over the

past six years (see table).

The vast majority of lending goes to

infrastructure, an area in which the region

continues to require massive investment.

Fortunately, this is one sector where populist

political interest meets the general need of the

economies. According to the bank, 64% in 2011

went to infrastructure, followed by 17% in the social

sector. Of the latter however, many of these

include improvements that could be classified as

infrastructure, such as a $500 million, five year plan

to connect two million Ecuadorian homes to

drinking water and sewage systems in 32 towns

and cities throughout the country. Not all loans go

to central governments, with regional and local

governments as well as public-private ventures

and private companies of differing sizes among

borrowers. Additionally, as a development bank, it

funds some small-scale social projects with non-

reimbursable loans.

Bolivian Enrique García has led the bank since

1991, by far the longest tenure of the five

presidents in its history, leading one investment

banker to quip that it’s “hard to tell where Enrique

García ends and the CAF begins.” For the

upcoming change at the bank’s helm, the

question of succession will be important to protect

investor confidence. All CAF presidents have been

either Ecuadorian or Bolivian, but this tradition

doesn’t form part of the bank’s charter. Hopefully,

its shareholders will be able to continue the

institutional heritage and avoid political pressure

that has made some the region’s central banks

caricatures of their former selves.

Sending a Message

Ecuador continues to milk foreign news

exposure thanks to its most prominent asylum

seeker, Julian Assange, who has by now spent

more than 100 days at the embassy in London. This

week, foreign minister Ricardo Patiño and his British

peer William Hague at the United Nations

attracted the media but, unsurprisingly, the two

sides failed to find a way out of the intractable

situation. Patiño sought to convince Hague that

the humanitarian aspect of Assange’s plight

outweighed any legal obligation the UK feels it has

under European Union treaties to extradite the

Australian former hacker to Sweden. The UK fails to

share Patiño’s position. In front of cameras, Patiño

was his usual undiplomatic self, asking whether “it

would be humane to try to keep Assange in the

embassy for months or years.” He also said that, in

the embassy, he could remain holed up a decade

“without right to his life or his privacy” and that the

UK isn’t permitting him to “enjoy his asylum status.”

At the same time, he insisted that Assange of

course is on Ecuadorian soil under the

government’s protection. Patiño mentioned the

risk of a medical emergency and that Assange is

considering the matter, as any exit from the

embassy would imply his immediate arrest.

In any event, the final decision could be up to

the Scandinavian kingdom’s government, as The

Guardian explained, not the Swedish courts. Its

foreign ministry, in turn, as we have reported, has

made it clear that nobody can be extradited if he

or she faces the death penalty – even explaining

that in Spanish. At the same time, it can’t extradite

anyone without court approval, although the

murky “rendition” of Egyptians between 2001 and

2006 happened, scandalizing Swedish public

opinion and providing Assange with some

ammunition for his claims.

The evening before the Hague-Patiño summit,

Ecuador had Assange speak via video in an event

suggesting that Latin America’s diplomatic asylum

practice was a basic human right, when

international law limits this interpretation to this

region alone. Assange grabbed some headlines

by criticizing Obama. While the media said he

appeared tired and unwell, at least part of this

could be attributed to it being a very late-night

contribution to the event.

The Assange publicity stunt still risks further

inconveniences. The US gave Ecuadorian journalist

Emilio Palacio asylum in August, a day after

Ecuador granted Assange the same status.

Palacio had previously traveled to Miami after he

was found guilty of libeling the president in an

opinion column in El Universo and among those

sentenced to jail and fined a combined $40

million. Ecuadorian officials have sought to

downplay the decision and likened it to the flight

of fugitive bankers to Miami in the wake of the

1998-2000 financial crisis. But President Rafael

Correa weakened that argument by arguing that

his cousin Pedro Delgado, currently the president

of the central bank, himself had had to flee to

Miami for supposedly taking a stand against

embezzling bankers during the crisis. The US thus

signaled it takes the threats to local journalists

seriously, but these show no signs of abating.

Correa also raised eyebrows on Tuesday by

saying that María Fernanda Luzuriaga was fired as

head of state-owned COFIEC for doing exactly

what Assange had done, i.e. leak information to

the media. She had also sought to get the

controversial $800,000 overdue loan to Argentine

businessman Gastón Duzac paid (EWR635).

Already, Ecuador saw the need to release a

Belarusian, Aliaksander Barankov, whom it stripped

of refugee status at the request of Europe’s last

dictatorship, only to back down amid a media

uproar. Barankov hopes the same will be done for

Grigory Basalygin, who has faced similar treatment

– stripping of his refugee status and jail without bail.

The interior ministry argued that he was wanted by

Russia via Interpol for assault and drugs trafficking.

Basalygin fails to come up in a search of Interpol’s

public online database however – Barankov does.

The editorial board of Analytica's Ecuador Weekly

Report publishes information obtained from expert

sources, public information and media reports,

and documents. Anonymity of interviewed sources

is protected.