STOCK IN TRADE

Ecuador 2013 | FINANCE | REVIEW: CAPITAL MARKETS

Ecuador's equity market needs more listings to become a regional force, and for citizens to view stocks as an alternative investment instrument to real estate.

The 1993 Capital Markets Law established a modern regulatory structure, opened stock market trading to banks and other firms, and encouraged the development of mutual funds. The bulk of activity on the country's two small stock exchanges currently involves trading in short-term commercial paper, bank obligations, and government debt. Yet, with most large companies in Ecuador still in family or entirely private hands and looking to external credit lines for financing, the country has yet to develop a vibrant bull and bear culture to rival the more popular investment of real estate. Therefore, in contrast to the government's thorough legal overhaul of the Ecuadorean banking sector, the modest size of its equity market is not due to any legislative restriction.

Despite the modest size of the market, the country has two different stock exchanges, known locally as the Bolsa de Valores de Quito (BVQ) and the Bolsa de Valores de Guayaquil (BVG), both of which date back to 1969. The Ecuindex, the price index and market prices of Ecuador, is one of the chief national indicators, and displays the development of the national stock market in its entirety; as stock prices of publicly traded companies rise or fall, the Ecuindex reflects the movement of the market as a whole. As of September 1, 2013, the Global Ecuindex had peaked at 1,100.52 on April 2013.

The stock market index of Ecuador fell 26% between December of 2007 and December of 2009, a time of deep national and global crisis. It is not recovering to levels attained prior to the crisis. And yet, political stability has promoted some activity, with more companies issuing investment papers. The value of the market capitalization of listed companies in Ecuador had climbed from $690 million in 1992 to $6.10 billion by June 2012, and the average rate of the growth of stock market cap from 2011 to 2012 was 31.73%, according to data published by Standard and Poor's. Market capitalization of listed companies as a percentage of GDP in Ecuador was 8.76% as of 2011. Its highest value over the past 19 years was 13.45% in 1994, while its lowest value was 0.58% in 1992. The figure for 2012 was 8.8%. In 2012, the market capitalization of listed stocks stood at $5.9 billion.

The first law regarding the securities market was passed in May 1994, a time when both BVQ and BVG became non-profit civil corporations by law. Four years later, new legislation established the main regulatory bodies and policy makers of the stock market, which gave the capital markets a firm footing. The main regulators of the securities market are the National Securities Council and the Superintendency of Companies. According to the Securities Market Act, the former is the governing body responsible for establishing the general policy of the stock market, while the latter is tasked with implementation and regulation of trading activities. The types of securities traded can be fixed or variable. The fixed-income securities are those documents through which the investor receives a known quantity in each period or grants the right to receive fixed interest in the terms of bonds, certificates of deposit, and so on. Meanwhile, equity securities are those that include a right of ownership over the assets of a company, which generate an uncertain cash flow and will depend on the performance of the company and the benefits. According to Latin Lawyer, only around 5% of the transactions on Ecuador's stock exchanges are for equity securities. Within the category of fixed-interest securities, the most frequently traded negotiable instruments, besides bonds, are a form of debenture that stock companies, limited liability companies, and branches of foreign companies domiciled in Ecuador may issue to acknowledge or create a debt for the issuer. This may later be converted to stock.

INVESTMENT FUNDS

Investment funds must be registered with the Securities Market Registry, which is an organ subordinate to the Superintendency of Companies. The largest investor class is the government of Ecuador, acting through the Ecuadorean Social Security Institute, and banks, followed at a distinct remove by local equity funds. International equity funds are a rarity on the Ecuadorean stock exchanges. There are approximately 20 local private equity funds listed in Ecuador. The fundamental requirement of these funds is registration with the Securities Market Registry, which is an organ dependent on the Superintendency of Companies (equivalent to Companies House in the UK). These funds may be described as currently in their initial stages and, therefore, are not yet fully developed. Investments mostly take the form of bank instruments.

QUITO

The BVQ has been active in tackling money laundering by developing its own back office system, SICAV. Its principle index is the Ecuindex, although two others are used in Quito. IVQ is the statistical measure of monetary value, while the IRRF is an index for bond performance. Currently, the BVQ has 44 (in 2012) listed companies and 35 brokers, all authorized by the Superintendency of Companies.

The average capitalization of the exchange for 2012 stood at $1,2 billion. The total traded value for 2012 was $104 million, with $0.64 billion from the private sector and $0.25 billion sourced from the public sector. The average annual growth rate of the stock exchange from 2001 to 2011 was 10%.

GUAYAQUIL

The BVG currently has 45 listed companies and 20 brokers. The main index is the BVG, which shows the evolution of a representative basket of stocks selected according to the trading volume and market capitalization of the companies. Some of the most relevant members are La Favorita, San Carlos, Holcim Ecuador, National Brewery, Banco de Guayaquil, Inversancarlos, Green Hill Forest, and Banco del Pichincha. Another index is the IRECU-BVG, a national index that is adjusted for movements of capital and the delivery of cash dividends. A third is the IPECU-BVG, an index of the Ecuadorean stock market prices, reflecting its evolution and adjustments to the movements of capital.

The total value of shares traded in 2012 amounted to $34 million—$57 million in 2010, $59 million in 2005, and just $1 million in 2009, in the midst of global economic turmoil. Total value of bonds traded for the same years was $1.83 billion, $1.81 billion, $1.17 billion, and $0.8 billion, respectively.

TWO JOIN TO MAKE THREE

Since January 2012, the BVQ and the BVG have begun unifying their trading systems with the Unique Interconnected Trading System (SIUB). A third company, owned equally (50%) by both stock exchanges, administers the trading system. This development was part of a global initiative to unify both stock exchanges in order to boost the attractiveness of the stock market and to put Ecuador on a stronger footing vis-à-vis other regional markets, thus increasing the overall number of issuers.

Ecuador's latest Securities Act envisages the stock exchange as a tax-paying limited company (SA), rather than being a non-profit organization that does not pay taxes. The stock exchange will promote further corporate transparency, as well as transparency in market operations, and better monitor data availability on listed companies.

BONDS

In Ecuador, the Social Security Institute and Social Security Bank (BIESS) are the chief players in the government bond market. And according to Reuter's, Ecuador is planning to issue sovereign debt, possibly before end-2013, or in 1Q2014. This would be a return to international debt markets five years after Ecuador defaulted on $3.2 billion of sovereign bonds from ideological, rather than fiscal reasons. Since that time, Quito has relied heavily on Chinese credits to finance liquidity-hungry infrastructure and other public works projects. The government signed a $2 billion loan with China Development Bank Corp. to finance public works projects and agreed on a further $571 million loan from the Export-Import Bank of China for construction of a hydroelectric plant. Ecuador's bonds have rewarded investors with the best performance in Latin America, returning 15% in 2012, compared to the 9.9% returns from Latin American countries on average, according to JP Morgan Chase & Co.