Ecuador’s stability: far from assured – Financial Times
Ecuador is at a crossroads. Lavish spending by a leadership not afraid to augment high oil revenues with extra debt has done much to improve living standards. Public spending has almost doubled from 24 to 44 per cent of GDP since Rafael Correa assumed the presidency in 2007. And with a 50 per cent approval rating that is the envy of his regional peers, Mr Correa is likely to bid for and win a fourth term in February 2017.
Or perhaps not. The plunge in the oil price has blown a hole in the country’s finances and, facing a $7bn-$8bn financing shortfall in 2016, the government will have to either cut back on spending, renege on its borrowings — or, maybe, both.
Ostensibly, investors should have little to fear. True, Mr Correa scared many away with his unforced default on $3.2bn of debt in 2008, when he called bondholders “real monsters”.
But he has since won back their confidence: last year, Ecuador returned to international markets with a $2bn 10-year bond yielding 7.95 per cent. The president remains unequivocal about Ecuador’s willingness and capacity to service its debt. Certainly, the next payment on its Global 2015 sovereign issue, due on December 15, looks assured.
That said, Mr Correa has lately stepped up his criticism of the country’s dollarisation scheme. By tying its economy and currency to the greenback, Ecuador has successfully kept inflation under control. However, the rise in the US dollar over the past two years has undermined its export competitiveness: alongside the oil price slump, this has sent the current account from an $800m surplus in the first half of 2014 to a $1.2bn deficit in the same period this year.
Despite his grumblings — such as a comment that the lack of an independent monetary policy is like “boxing with one hand” — the president is well aware that he would not survive an end to dollarisation.
Where he may find more wriggle room, though, is when it comes to fiscal austerity. His finance minister has suggested spending cuts and tax increases for 2016 of $4bn, a 17 per cent reduction from the 2015 budget, which in itself contained a cut of $2.2bn. While a severe belt tightening is necessary after the budget deficit ballooned to 6.3 per cent of GDP in 2014, it comes at a time when economic growth has ground to a halt. Analysts are now expecting 0.4 per cent growth for the year, rather than the 4 per cent the government had initially predicted.
That does not sit well with the ruling coalition’s plan to get their man elected for a fourth time, particularly since this first requires legislative passage of a constitutional amendment to remove term limits. That amendment will almost certainly pass in December, since the coalition has the required 70 per cent majority in parliament. But it could prove a lightning rod for street protests, since most of the population believes this issue should be put to a national referendum. Already, the administration has had to backtrack on introducing inheritance and capital gains tax increases after a popular backlash.
The tension between a president bent on maintaining popularity in order to win another term, and the need to cut back on the social largesse voters have come to expect, is obvious. It explains why Medley Global Advisors, a macro research service owned by the Financial Times, is cautious about the prospects for Ecuador’s bonds despite superficially appealing yields of almost 20 per cent. While the country has signed oil supply deals with both China and Thailand recently, the cash from those has been slow to flow and will not bridge the financing gap if the government fails to push through public spending cuts.
To add insult to injury, Ecuador faces an imminent arbitration ruling at the World Bank that could cost it around $2.5bn. And closer to home, there are concerns about increased activity by the Cotopaxi volcano that led the government to declare a state of emergency in August, plus the risk of a strong El Niño phenomenon that could lead to bad weather which might further strain public finances. It will take both determination and good luck for Mr Correa and his country to weather these storms.
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