Debt restructuring is a necessary but insufficient condition to help Ecuador overcome liquidity and debt sustainability challenges, Fitch Ratings says in a new report. In addition to a deep restructuring, sustainability will require stronger growth and a fiscal adjustment that are likely to prove challenging regardless of the outcome of 2021’s elections.
Bondholders approved Ecuador’s request for a four-month deferral of interest payments in April to allow time for a comprehensive restructuring, leading Fitch to downgrade its sovereign rating to ‘RD’. Ecuador’s request came amid a severe liquidity crunch and economic crisis caused by the coronavirus pandemic and oil price shock. Yet this development only exacerbated existing problems after years of low growth, a social backlash against policy adjustments, and failure to keep the country’s IMF programme on track.
Ecuador’s debt/GDP and interest/revenues metrics are moderate compared with other low-rated sovereigns, but solvency is weak given the country’s low debt tolerance. This reflects its unique vulnerability as an oil-dependent, dollarised economy heavily reliant on external credit. External interest payments are already high (10% of current external receipts in 2019) and international reserves are low. Servicing external debt during a liquidity shock and pandemic had become politically untenable and put macroeconomic stability at risk.
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