The Big Idea
Ecuador | Fiscal slippage
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Higher gasoline subsidies have raised questions about Ecuador’s fiscal accounts and left Eurobonds slightly weaker, given the importance of compliance with the IMF program. Data through July suggest Ecuador remains on track to meet IMF targets, with room to absorb higher transport subsidies, especially with oil prices elevated. The Noboa administration has signaled faster spending later this year amid possible climate and political pressures. Still, IMF targets should remain the policy priority, with fiscal consolidation anchoring credit spreads and potential rating upgrades. Month-to-date underperformance may reflect a technical realignment with Argentina after its weakness last month.
Recent fuel-subsidy headlines underscore the need to watch both headlines and data in Ecuador. Lower subsidized gasoline prices are not ideal for a country that needs a multiyear fiscal adjustment to close a structural deficit. But central government fiscal trends still look supportive. Data through June far exceeded the performance criteria for the sixth program review, with results expected soon after the mid-September data release. The nominal and non-oil primary accounts both posted surpluses in the first half of 2026, against deficit targets. The next review should also confirm compliance with structural benchmarks on public procurement governance and the opening of the mining cadaster. IMF conditions were always tougher for targets later this year.
The 12-month rolling fiscal data through July broadly match year-end 2026 targets. Ecuador has more room on the non-oil primary fiscal target, allowing slightly higher spending in the second half of 2026 than in the same period last year because of the large first-half surplus. This may be the more important target because it better reflects underlying structural trends beyond the recent oil windfall. Preliminary August data still show full-year compliance if September-December trends match 2025. There may be less flexibility on nominal targets when comparing year-to-date results with trends from the final months of 2025. That does not include the benefit of higher oil prices or the extra budget flexibility created by the sharp deterioration in 2025 fiscal data.
What’s the net oil impact?
Oil revenue continues to show a year-to-date windfall, running at twice last year’s pace and accounting for about 10% of total revenue. The transport gasoline subsidy remains small at $122 million year to date through July 2026 in the central government accounts. Broader subsidy losses show up in the gap between domestic derivative sales and import costs. The IMF estimates a net fiscal windfall of about $25 million for every $1 increase in oil prices. The recent rise in oil prices above $100 a barrel suggests Ecuador has some room to pass on those benefits, though the ratio may fall to about $20 million in net revenue gains after the subsidy increase. That would still mean a sizable windfall of 0.5% of GDP, based on the 2026 budget assumption of $54 a barrel and current levels of about $90 a barrel for Ecuador’s oil mix.
The Noboa administration should manage the oil windfall carefully and prioritize meeting IMF fiscal targets, which remain central to investor confidence and tight credit spreads. The more important test will come in March 2027, when year-end 2026 program targets are assessed. Recent Eurobond underperformance may be better explained by relative-value dynamics among other high-yield issuers. Ecuador is often compared with Argentina, whose recent weakness may have pushed Ecuador yields higher by weakening external risk sentiment. It also may have encouraged investors to rotate out of Ecuador and into Argentina in search of mean reversion toward spread parity. These technical factors may dominate near term, but the recent weakness does not change our view that Ecuador still has supportive IMF relations, fiscal flexibility and a record of program compliance.
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