November 26, 2020

Bond issuance "buys time" for Ecuador's complicated economy

The next issuance of domestic debt bonds for about 2 billion dollars announced by the Ecuadorian Government reflects the fragile situation of the economy of a country that still needs to resort to debt to overcome its complex fiscal crisis.

From the future operation it has only transpired that totals 1,936 million dollars and has been notified to the Stock Exchanges of Quito and Guayaquil.


Leveraging more indebtedness "reflects the difficulty that the Government is having to make the fiscal adjustment," economist Alberto Acosta Burneo, editor of the economic-political magazine Weekly Analysis, told Efe.

A difficulty that increased after the economic and political setback suffered in October when, cornered by social demonstrations, the Executive had to repeal a decree that eliminated fuel subsidies with which he intended to raise an additional $ 1.4 billion.

But the country lost more than double that amount in the eleven days of social protests due to road blockades, looting, destruction of public goods and temporary suspension of oil exports, among other consequences.

With that defeat under his arm, the Executive fit a few days later a new coup, which came when Parliament filed its economic reform projects, with which he sought new income.

Under the threatening gaze of the indigenous movement (which led the October protests), the Lenin Moreno Government is now looking for mechanisms that allow targeting the fuel subsidy and, thus, recover a portion of the revenue it intended.

It also keeps its eye on the Parliament, which studies a new economic project of the Executive, less ambitious, in tax matters.

With that outlook, the Government will have to rely on indebtedness more than previously thought, while the adjustment will be much slower than expected, Acosta said.


But, insisting on the recipe of living on indebtedness is "unsustainable" in the long term because, among other consequences, it keeps the economy in a fragile situation, said this Master in Economics from the University of New York.

"It means that we are only postponing the adjustment and that the bulk of the adjustment will have to be done by the new Government in 2021, facing the same costs, but with the aggravating factor that the level of indebtedness will be higher and the cost of serving that debt continues going up day after day, "he explained.

With a projected fiscal gap for this year of around 3,600 million -which can amount to 5,000 million dollars if the Government does not "monetize" the expected assets, as intended-, that adjustment has to arrive sooner or later with the adoption of measures Global

Among them, he listed the austerity in public purchases and on the state payroll, insist on the targeting of subsidies and the renegotiation of the debt of around 8,000 million dollars with China to try to get longer payment terms, which It would help public finances, according to the expert.

"It takes responsibility and commitment to the adjustment, otherwise the situation can get very complicated," he warned.


Acosta Burneo emphasizes the importance of adjusting the imbalance because in a dollarized economy, such as Ecuador, there is no alternative to "pay excess spending with an inflation tax, that is, printing tickets."

The economic analyst applauds that Ecuador has had the dollarized economy since 2000, because "otherwise, the Government would have been printing tickets indiscriminately for many years."

And although it has dollarization as the mainstay of the economy, access to international financing has been complicated due to the recent strong rebound in country risk.

With a minimum of 497 points on September 10, that indicator was escalating as the political situation of the country was getting complicated.

Thus, on October 16 it reached 823 points and exceeded 1,000 points after the archiving of the economic reforms in Parliament.

This means that "investors are gradually getting nervous about Ecuador's difficulty in making adjustments," said the economist, adding that "without fiscal adjustment, the risk of debt default is much higher."

And Ecuador is experiencing a fiscal crisis of "great magnitude and the pace of adjustment is progressing slowly", so this issuance of domestic debt bonds is a lifesaver that, however, will not work for a long time.

Therefore, "what he does is buy some time, but at the end of the day he continues to aggravate an unsustainable fiscal situation," the expert concluded.

Susana Wood

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