The new government will have more expenses, due to the El Niño Phenomenon and the insecurity crisis, but the income is not enough and there are few lenders.
Caravan to promote the “Yes” in the consultation to close the ITT block in Yasuní.
One of the biggest challenges that the government that replaces Guillermo Lasso’s in 2024 will have to face will be obtaining loans to finance public spending.
International investment banks such as Barclays and Santander US Capital Markets LLC agree on this.
This is due to the fact that the new administration will have to face the ravages of the El Niño Phenomenon, which will increase public spending.
And more investment in security is to be expected, due to the crisis the country is going through, says Santiago Mosquera, dean of the Business School at the University of the Americas (UDLA).
Will the new government open the spending faucet?
Public spending will rise regardless of who wins the second round in the extraordinary elections.
The question is how much it will increase and that will depend on the economic model that the new president wants to promote and if he seeks re-election in 2025, adds Mosquera.
The left-wing candidate, Luisa González, has spoken of increasing social spending and resuming programs from the government of Rafael Correa.
Meanwhile, center-right Daniel Noboa has talked about plans like renting barge prisons and programs for farmers.
And, in this scenario, state revenues from oil and taxes will not be enough, says Alejandro Arreaza, an economist at British investment bank Barclays. Therefore, the way is to resort to more debt.
All this in a scenario where the alternatives to obtain loans are increasingly limited, since the Government of 2024 is considered “transitory”, since it will last less than two years.
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Will increase spending
Investors and creditors of Ecuador’s public debt hope that the new President will have a coherent and realistic plan to contain the insecurity crisis, says Mosquera.
However, that will require more public spending. The Lasso government, questioned about its handling of the biggest insecurity crisis in the country, budgeted USD 3,902 million for this sector in 2023; that is, around 3% of the Gross Domestic Product (GDP).
And, if the new President has plans to run for re-election in 2025, the chances of growing public spending also increase, in order to have greater popular support and continue to govern, adds Mosquera.
Another challenge that will push up public spending for the new government is the imminent arrival of the El Niño Phenomenon, as emergency road works, repairs and even subsidies for victims will be required.
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Less oil revenue
The closure of the ITT oil field, due to the victory of the “yes” in the Popular Consultation on August 20, 2023, will mean that the State will stop receiving income of about USD 1,200 million a year, according to the Ministry of Energy.
However, in international markets it is still not clear how much money will stop entering the State Budget, says Arreaza.
The foregoing, because of the USD 1,200 million, production costs, tariffs for oil companies, contributions for Amazonian towns and the expense of fuel imports must be deducted.
For this reason, Arreaza’s projection is that the reduction of oil income to the Budget will be USD 500 and USD 600 million per year.
But the actual number will depend on when the plan to shut down the wells, which has not yet been submitted, begins.
For Banco Santander, the losses due to the closure of the field should be offset by a reduction in the fuel subsidy.
Santander and Barclays even believe that the new president of Ecuador could find maneuvers that allow him to postpone the closure and keep the field in production for longer.
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A cooling economy
Another problem is that tax collection will be lower in 2024. One of the reasons is because household consumption has cooled, due to insecurity and political uncertainty, says Mosquera.
In addition, the Foreign Currency Outflow Tax (ISD) rate will be 2% in 2024, lower than in 2023.
To this is added that natural persons will pay less Income Tax, due to the tax reform of June 2023.
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Few options to borrow
With this scenario, government spending will be greater than revenue in 2024, this is known as the fiscal deficit.
Barclays forecasts that the deficit will be equivalent to 3% of GDP in 2023 (around USD 3.6 billion) and by 2024 it could be 3.5%.
A higher deficit implies that the Government will have to request more loans to cover these expenses and, in addition, for debts acquired in the past.
And there are few options. Accessing loans from multilaterals, such as the International Monetary Fund (IMF), would not be viable in a government that will last less than two years, and issuing external bonds would be too expensive, says Arreaza.
