Ecuador elections -- Why bond funds are better

December 6, 2006

Last week, Ecuador announced the results of its Presidential election, naming Rafael Correa the victor. As President, Correa plans to decrease Ecuador's foreign debt and no longer allow the U.S. to operate anti-drug flights from Manta. He also promises to convene a constitutional assembly that would give greater power to the president.

What Ecuador's elections mean:

Ecuador has had great economic and political instability as a result of an over-reliance on oil exports and government leaders who were too eager to take advantage themselves from oil windfall profits. Since 1990, Ecuador has had seven Presidents.

However, since 2000, Ecuador has adopted the U.S. dollar as its currency, helping to stabilize its economy. As a result, Ecuador's GDP growth rate was 4.6% in 2005. In global terms, Ecuador is becoming more affluent: GDP per capita was $4,300, better than Vietnam ($2,800)and India ($3,400) but less than Venezuela ($6,400) and only one-tenth that of the U.S. ($41,600).

Action steps:
Ecuador’s threat to default on its bonds caused that country’s bond market to drop, which demonstrates why emerging market debt is so risky.

Therefore, an emerging market bond fund is a better investment than any individual country bond or bond fund. The higher returns are good to beat inflation, and they also provide a hedge against U.S. bond funds and emerging market stock funds. Ask your financial advisor if it makes sense for your investment goals.

Source: Voice of America News web site; CIA Fact Book web site

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