The Big Idea
Ecuador | Fiscal progress
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Ecuador remains the stealth outperformer so far this year. It is showing low exposure to rising US Treasury rates and a track record of effective policy management so far. But there is still some uncertainty on the next International Monetary Fund loan disbursement, with local headlines suggesting fiscal accounting discrepancies and officials blaming logistics. This sounds all too familiar for a country that still needs to sort out best practices for reporting broader public sector finances. This may delay but not undermine IMF support, especially considering the marked progress on fiscal performance last year as well as commitment for further progress this year.
Ecuador’s Finance Ministry recently released updated fiscal data for 2021 and 2022. There is not the same rollover and liquidity risk that existed after restructuring the country’s debt, so not the same scrutiny for the low coupon payments. However, the breakdown does merit review for two reasons:
- The fiscal performance provides a preview of the solvency risks on future payments, and
- The sources of financing provide insight on the timing for re-entry to Eurobond markets.
The Lasso administration is quickly gaining credibility on commitment to fiscal discipline. The huge improvement on the fiscal performance from a $7.1 billion deficit in 2020 to $3.7 billion deficit 2021 mostly reflects normalization from the Covid shock and the positive lift from higher oil prices. However, it’s important to also recognize concerted efforts to restrain spending with a reduction in bloated public payrolls. Permanent spending showed an overall net decline and would have been much lower if it were not for the higher derivatives (on higher oil prices). Ecuador is one of the few countries that delivered fiscal performance in 2021 that improves on pre-pandemic 2019 levels.
The 2022 budget was revised to reflect the approval of tax reform in December as well as higher oil prices with a reduction from $3.6 billion to $2.3 billion central government fiscal deficit. This represents near primary balance excluding the $2 billion in interest debt service and yet another record low on the fiscal performance for the past nine years. There is around 0.3% of GDP in expected revenues from tax reform with the majority of the improvement probably explained by an upward revision to oil prices. The oil price windfall alone could deliver 1.7% of GDP in extra revenues at current oil prices. However, we assume a more conservative oil price that allows for room to outperform, or flexibility on political and social pressures.
The 2022 financing program still assumes large gross financing needs of $11.2 billion with the “other category” at $4.2 billion representing the largest single liability of accounts payable (arrears) and liquidity management. The transparency on arrears is welcome; however, it is concerning that these large liabilities weigh on the debt burden and undermine the improvement on the above-the-line fiscal deficit. The local headlines cite data accounting discrepancies for the delay on the IMF loan disbursement. However, Minister Cueva blames logistics such as scheduling delays and the Omicron variant and reaffirms positive IMF relations with expectations of the loan disbursement in early March.
Ecuador’s financing strategy continues to rely on multilaterals with imminent disbursement of $700 million from the World Bank. There was again reference to $1.35 billion in private sector financing or potential re-entry to Eurobond capital markets. However, the emphasis remains on “maximizing multilateral lending and deepening domestic markets” with Eurobond issuance only when market conditions permit. It seems logical that any early re-entry to Eurobond markets would capitalize on ESG issuance—similar to the social bond—to diversify their investor base and lower their cost of funding.
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