Richard Francis: “The problem is not this year, but next year and 2020”
From New York, Richard Francis, Director of Sovereign Debt in Latin America of Fitch Ratings, one of the three most important risk rating agencies in the world, spoke with EXPRESO by telephone about the causes of the reduction in the credit rating of the Ecuadorian debt. (from B to B-) that the agency made last week and the perspectives.
– Is the responsibility for the downgrade of the current or previous government?
– It can be said that both of them, because the fiscal deficit was really quite high since 2013 and that is why the financing needs have been high in the last four years and they remain high.
– What was the determining factor to lower the grade?
– I think that more than anything are the financing needs of the Government, which are still quite high: 11.7 billion dollars this year. Next year will fall, but it will still remain high (8,500 million dollars, according to Fitch) and of course the markets are asking for very expensive interests for countries like Ecuador. Then it will be very difficult for the Government to go out to the markets with these interest rates. The other thing is that there are not many sources of financing in the local market.
– The Government’s plan has sought to reduce costs and even now there is talk of removing subsidies, has not that been enough? Is there still more to be done?
– Of course there is an important fiscal adjustment. We believe that the fiscal deficit this year will reach 3.9% of GDP. Last year it was 5% and yes, it is an adjustment, but in a dollarized economy almost 4% fiscal deficit is still high. We think that the government can reduce the deficit even more, but it will be difficult to reach its goal of 2% of GDP in four years, because every year it will be harder to make cuts with low economic growth.
– Can removing fuel subsidies help to improve the qualification in the future?
– Sure, that can have a positive impact on the balance, because of course, the subsidies are quite high and that can help a lot to reduce the fiscal deficit. We must see what the plan will be.
– Does Ecuador have no choice but to go to the International Monetary Fund (IMF)?
– That is a way to obtain financing and not only from the Fund, but also from the World Bank, especially when the markets are closed. But on the political side it can be difficult.
– A finance minister like Richard Martinez with a more pragmatic vision and economic law were not enough to keep the note?
– It’s always difficult. We think that at least the government has an adjustment plan (…) But we had a negative outlook for more than two years and we had to make a decision.
– Do you think Ecuador can get the financing it needs for the remainder of the year?
– We think so. The government can find financing flows for the remainder of the year, with a bit of difficulty. For us it will be more difficult next year and 2020. In 2020 Ecuador will have to pay the maturity of a bond and will need more resources, the needs will go up even more in that year. The problem is not this year, it will be how to finance next year and especially in 2020.
– How much did the complicated international environment weigh on economies like Latin America to lower the rating?
– When the Government needs to go to the markets and the markets are very expensive, not only because of issues of Ecuador, but to emerging economies in general, because of Argentina, because of Turkey, the interest rates are not only for Ecuador, in these countries in general they have gone up. Ecuador’s problem is that it really needs to go to the markets and the interest rates are so high and that is almost impossible. The markets are now asking for more than 10% (in interest) for a bond from Ecuador. Then it is very expensive.
Low note with high oil
Through his Twitter account, Rafael Correa said: “I am going to nominate the Finance Minister for the Nobel Prize: nobody can reduce the credit rating with the price of oil recovered. You have to have talent. “
One more reason to go to the IMF
Former Finance Minister Fausto Ortiz said that the reduction of the rating is another reason to dismantle subsidies and look for the IMF to improve the liquidity position that allows better yields when bonds are placed.
High expenditure lowered the note
For the editor of Weekly Analysis, Alberto Acosta Burneo, the “lack of control of public spending during the bonanza has left us in a precarious situation (…) They are worried about fiscal narrowness and high weight of the debt.
Wall Street is not fooled
The economic analyst Danilo Albán, said that “nobody can cheat Wall Street. Fitch Ratings downgrades Ecuador to “B-“. Let it be clear that heterodox economists warn him. ” (I)