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Ecuador’s economy has fallen 3 percent this year, the worst decline since the introduction of the dollar 16 years ago. The administration of president Rafael Correa has had to make concessions to the market. (Photo: Andes)
Monday, August 8, 2016

Ecuador: Pressure Mounts

Ecuador issues expensive bond amidst a GDP decline of 3 percent.



QUITO -- The finance ministry recently attracted international bond investors for the fourth time since Ecuador’s return to the market in 2014. Ecuador issued another $1 billion, acting quickly after sensing that the initial shock from Britons’ vote to leave the European Union, which derailed the planned issue a month ago, had passed. As has been the case with the three previous issues, the prospectus was not immediately available to the public. Overall, the relative rise of the price of oil facilitated the latest issuance, which was planned in the annual budget. From the first-quarter lows, the rise of Ecuador’s top export pulled down yields correspondingly: Yields have fallen by more than 50 percent since peaking at 1,750 basis points mid-February.

Still, the interest rate once again went into double-digit territory, reaching 10.75 percent, making it the highest since the return to markets. The previous issues interest rates of 7.95 percent, 10.5 percent, and 8.5 percent, respectively. Also, this latest issue piles pressure on medium-term debt given that it doesn’t extend maturities: it is due in March 2022, while $1.5 billion become due on 2020 and an additional $2 billion mature in 2024. Under the 2008 constitution, debt may only be used to fund infrastructure projects, and will be used in this sector, one of the most affected by the shriveled availability of funds for the government.

This term however is flexible; the money could go to be outstanding debt to government contractors, which currently stands at around $2 billion, according to economy minister Patricio Rivera. The latest issuance in any case reduces some of the short-term fiscal pressure and provides liquidity amid the recession. It also shows a divorce between the worries of local investors, concerned with the domestic situation, and the external market, which looks almost exclusively at the price of oil to gauge Ecuador’s financial stability. According to Rivera, the government expects to close the financing gap with loans from multilateral lenders and loans raised by state-owned Petroecuador.

The fresh $1 billion won’t however provide a jolt of confidence in economic policy, which is what Ecuador would really need to help get the economy back on track. The administration of president Rafael Correa has indeed had to make concessions to the market. This has included restoring ties with the International Monetary Fund, through Article IV reviews and measures including the increase of value-added taxes in the wake of the April 16 earthquake. As is the case with Ecuador’s inability to attract levels of foreign investment in line with those of most other countries in South America, much more will be required however before it can hope interest rates charged by the market drop to levels comparable to those of other countries rated “B” by major international ratings agencies.


Ecuador’s central bank (BCE) in July released national accounts figures showing a 3 percent on the year (y/y) fall in GDP, the worst decline since the introduction of the dollar.

From the previous quarter, October – December 2015, the economy shrank 1.9 percent. With a third straight quarterly decline, the recession is impossible to hide, but president Correa, who may yet seek reelection next February, still refuses to use the term. A two-week delay past the BCE’s regularly scheduled publication date led to suspicions that the administration was attempting to conjure a positive spin to the data. Those thoughts were not disappointed as, during his Saturday radio and television show, president Correa said Ecuadorians have already left the worst behind them.

“We’re not going to decrease (sic) like the IMF says (4.5 percent y/y for the whole of 2016),” Correa said. “With a bit of luck, we’d grow in 2016, despite all manner of things having happened to us,” he added. “I’m very optimistic in this second semester (sic).”

On the downside, he was referring to the plunge in the price of oil and massive strengthening of the dollar; the 7.8-magnitude earthquake in April and its continuing aftershocks, which caused at least $3.3 billion in damage, according to the government; as well as the lost Occidental Petroleum arbitration suit, saddling Ecuador with close to $1 billion that it had to pay the US oil company (avoidable, had its assets not been confiscated with his political support in 2006).

“It has been a very hard semester, I hope we understand the gaps, the restrictions that we confront, but that’s where the art of governing is, and a bit also the art of the economy too: to do the best of what’s possible with all these restrictions,” he said in an economics presentation at ESPOL university in Guayaquil, a presentation widely spoofed given the large number of formulas he drew on a marker board which, in the end, emptied into tautologies, leading to a fair amount of jokes on social networks.

On the year, the declines showed crisis levels in a number of segments. Imports plunged 11 percent, gross capital formation (including both the private and public sectors) 8.9 percent, household consumption 3.9 percent.

Government consumption declined 3.2 percent, still achieving a high level considering the amount of spending in the record budgets of previous years. On the upside, and from the industry perspective, the BCE reported strengthening of agriculture, electrical output, and the oil sector. Financial services were almost flat and Correa claimed that government administrative measures have been responsible for the banking industry to be liquid and sound, thus taking part of the credit for banks being able to announce they will be able to lend $10 billion in the second half. Net of debt payments to banks, the increase may amount to around 10 percent on the year, nonetheless an important signal. Hopefully, this will not reduce the quality of credit portfolios and maintain solid credit standards. But to say Ecuador is on the cusp of recovery is unrealistically optimistic.


Ecuador’s office of the attorney general had said that it would pay $112 million ($96 million plus interest) owed Chevron under an arbitration award into an escrow account, rather than the US oil giant directly. It argued that it was barred from making the payment because a judge in Lago Agrio had ordered the money be paid to a group of plaintiffs suing the company in a civil case instead; in earlier rulings in the convoluted case that began in the early 1990s, the company must pay them $9.4 billion (that money however won’t be forthcoming unless a foreign court in a country where Chevron holds significant assets agrees that the ruling here was proper enough for enforcement, a claim that has lost merit since a US court found the plaintiffs’ main lawyer guilty of racketeering to win the case in Lago Agrio). Quietly however, the plaintiffs’ lawyers asked the injunction to be withdrawn in time for the government to make a timely deposit to Chevron. They argued later that they were seeking to avoid damage to the country’s image.

Economy minister Rivera said that the payment of $1 billion to Occidental Petroleum in a separate arbitration case had caused the government’s debt to providers to balloon. This however accounts only for half of the debt, and signs have been clear for several years that the government would eventually have to pay for the assets confiscated from the oil company in 2006, under political pressure from candidate Correa. With the political decision having been made a decade ago, at least it could have saved for the eventuality.

The payments do mark another welcome, if unenthusiastic, step towards greater economic orthodoxy, as well as a recognition of international legal obligations. Absent a stronger recovery, further down the road – not soon, since payments on foreign debt remain relatively light – one can however imagine a scenario under which, like Venezuela, Ecuador will have to see its public services crumble further in order to service its international debt.

According to some, this has already occurred. The payment to Chevron scandalized public opinion: Center-left opposition legislator Ramiro Aguilar revealed that the amount was covered by a transfer to the treasury account from that created to hold funds collected via the recent increase in value-added tax, among others, aimed for reconstruction of earthquake-hit parts of Manabí and Esmeraldas. The finance ministry called the controversy an “erroneous interpretation” of its activities managing public accounts. “We ratify that the totality of the resources collected by the Organic Law of Solidarity and Citizen Co-Responsibility will be used for the reconstruction and productive development of the zones affected by the earthquake.” According to the finance ministry, the funds rather went as a priority to the overdue payment of goods and services provided by companies in the afflicted areas. The earthquake, and the related fiscal weight of reconstruction costs, of course largely are indeed unforeseen expenditures.

But the inability to pay providers on time shows the lack of preparation for a cooling economy, of whose risk many analysts, including ourselves, have warned for years. Other information revealed by Aguilar is similarly troubling. In a letter to Gabriela Rivadeneira, the president of congress, the head of the “Technical Secretariat for Reconstruction,” Carlos Bernal, said that he didn’t know how and when exactly money was being spent. Neither his office, nor a reconstruction committee, nor the vice presidency, whose head, Jorge Glas, is trying to become the correísta presidential candidate, “are direct executors, contractors of the different programs and projects that are going ahead within the reconstruction process;” ask the people signing the contracts for the information, he adds. Thus in the end, president Correa has simply added to the bureaucracy, one that isn’t hesitating to take political credit for work being done, on top of the local, provincial, and central government instances. 

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission. 

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