The country risk fell again and stood at 1,321 points, the lowest figure of the Noboa Government. What does this reduction mean for the country?
Ecuador’s country risk continues to decline. This indicator closed on March 4, 2024 at 1,321 points, which means a drop of more than 800 points since President Daniel Noboa assumed power on November 23, 2023.
The fall of the indicator reflects the market’s optimism regarding the “advances” in Ecuador’s economic policy.
A first positive sign was the increase in VAT to 15%, achieved by Noboa through the Internal Armed Conflict Law, which will go through the ministry of law.
Another message viewed with optimism by the market was President Daniel Noboa’s announcement of his intention to sign an agreement with the IMF.
But what does it mean for Ecuador if the country risk falls. We tell you:
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What is country risk?
Country risk is an indicator that measures a country’s probabilities of falling into default or default; That is, stop paying your foreign debt.
The higher the indicator, the greater the risk that a country will not meet its obligations to foreign creditors.
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How risky do investors see Ecuador?
Although the country risk has fallen, the indicator continues to be above its peers in the region. With 1,321 points, Ecuador ranks fourth in South America with the highest indicator.
Ecuador is after Venezuela, which has the highest country risk in the region, with 22,296 points; from Bolivia with 1,737 and from Argentina with 1,595 points.
On the other hand, the country with the lowest country risk is Uruguay, with 87 points.
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How does country risk affect the Government?
The main problem that a country and its Government face when having a high country risk is that access to credit or loans in the international market becomes expensive.
For example, if Ecuador went to the international market at this time to issue sovereign bonds, it would have to pay a rate of 18% or more annually, which is onerous.
Although it is a rate lower than the 25% annual rate that would have had to be paid in November 2023, it is still high, since international organizations lend to Ecuador at a 3% or 4% annual interest rate.
For this reason, market analysts say that Ecuador has closed, for the moment, the financing option through the bond market.
And this occurs at a time when the country has millions in arrears with municipalities, suppliers and the IESS itself. In addition, it has presented liquidity problems, which were reflected in delays in the payment of salaries to the bureaucracy.
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What effect does it have on citizens?
A high country risk not only makes external credit more expensive for the Government, but for companies and banks, which also need liquidity.
And that has an impact on citizens.
Specifically, banks have had to pay high interest rates to fund themselves abroad and bring liquidity to the country to place loans.
If credit is more expensive, what banks have left is to fund themselves in the country, but that means paying high interest rates to depositors.
The end effect is that banks have less liquidity to lend money, and credit contracts.
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How does it affect the investment?
Investors take country risk into account before deciding whether to bring money to Ecuador. Even companies with investment plans or commitments on the agenda could rethink whether or not they bring money to Ecuador.