The mutual death changes the outlook for Ecuador in terms of access to external credit, with a view to financing the 2023 Budget and State investments.
The Minister of Economy, Pablo Arosemena, met on May 17, 2023 with his team to analyze the economic reforms that could be sent via decree law.
The mutual death decreed by President Guillermo Lasso will have effects on access to external credit to finance the Ecuadorian Budget, in a scenario of falling oil prices.
The Ministry of Finance needs an oil price of USD 65 per barrel to finance the 2023 Budget, but from January to April the price of Ecuadorian crude was USD 64.5.
The Ministry of Finance expected oil revenues of USD 1,224 million in the first four months of 2023, but received half: USD 607 million.
It is not the only challenge facing the Government. Ecuador needs USD 200 million to address the damage caused by the winter, which already leaves 90,879 homeless.
To pay for the winter damage and offset the drop in oil prices, the Ministry of Finance estimates that it must secure an additional USD 1 billion in external credit lines.
The deficit is manageable
With a country risk of 1,832 points, Ecuador has closed the doors of the international debt issuance market.
If the country were to issue new foreign debt bonds, it would have to pay an interest rate of more than 20% per year to offset the risk for buyers of the bonds.
This is almost five times more than the 4.98% annual rate on loans with multilateral organizations such as the World Bank or the International Monetary Fund (IMF).
And now, in the midst of a scenario of political uncertainty, the multilaterals may be more cautious when it comes to approving and disbursing credits for Ecuador, says Alejandro Arreaza, an economist at the British bank Barclays.
At the beginning of 2023, Ecuador budgeted credits from multilateral organizations for USD 3,066 million, but the Ministry of Finance has cut that forecast to USD 1,291 million.
Until April, the multilaterals had already disbursed USD 194 million for Ecuador.
Even the IMF will want to have a clearer political outlook before considering a new credit for Ecuador, adds Arreaza.
Ecuador successfully completed a credit program with the IMF in December 2021 and could access a financing line to deal with natural catastrophes, which does not imply negotiating a new program.
China and the United States
Despite the cash pressures for the State Budget, Arreaza believes that there are options to manage them.
“Fiscal risks for Ecuador may come more from fluctuations in the price of oil than from political instability,” he says.
And he adds that the fiscal deficit or the gap between income and expenses in 2023 is manageable.
According to budget execution, the Ministry of Finance expects to end the year with a deficit close to USD 2.9 billion, which represents 2.5% of GDP.
However, due to the fall in the price of oil, the deficit could increase to USD 4,000 million, according to the former Minister of Finance, Fausto Ortiz.
This could result in the government ending up accumulating arrears with its suppliers at the end of the year, adds Ortiz.
To close the fiscal gap, Arreaza says that one option is the placement of internal debt bonds.
On the other hand, Ecuador has the doors open to seek credit in China, and the government of Guillermo Lasso has received the explicit support of the United States, which could facilitate the achievement of a new line of credit with the IMF.
In President Lasso’s remaining six months of government, the administration could choose to invest heavily in road works, which can boost the economy and employment.
