Fitch: Fiscal Challenges for Ecuador’s New President

Vale leads LatAm market cap, Intellectual Property Index, Hanke Misery Index.

BY LATINVEX STAFF

Guillermo Lasso, who assumes Ecuador’s presidency on May 24, faces major challenges, Fitch Ratings warns.

“The administration will face a challenging congressional landscape, social pressures and difficult trade-offs in balancing growth and fiscal objectives,” it says.

Lasso promises to continue shifting away from heterodox policies that have undermined economic fundamentals in the past decade, but any major improvement will hinge on difficult fiscal adjustments and growth-enhancing reforms that are far from assured, the ratings agency says in an analysis.

Lasso -has outlined a liberalizing economic agenda to boost growth. He will also benefit from the National Assembly's recent approval of the Defense of Dollarization Law, an important EFF requirement that limits room for dangerous inorganic money creation by the central bank.

But his CREO party won just 12 of 137 seats in the National Assembly in February's general election, and its electoral alliance with the PSC (18 seats) appears unlikely to last as a legislative alliance, so advancing legislation will likely require support from Pachakutik (27 seats) and Democratic Left (18), which have voiced clear ideological differences with Lasso's agenda, Fitch says.

“Previously fickle congressional alliances have forced governments to negotiate support issue-by-issue and compromise on policy positions,” the ratings agency points out.

Fiscal consolidation is the cornerstone of Ecuador's IMF Extended Fund Facility (EFF)  and is the new government's key challenge.

“However, Lasso's strategy may rely more on expected but uncertain revenues from higher growth and oil production than concrete fiscal adjustments. His pledged tax reform appears focused on lifting growth rather than increasing revenues by 2.5%-of-GDP as the EFF requires.

Lasso has ruled out increasing tax rates and has provided greater detail on measures that would reduce collections (such as phasing out the ISD tax on dollar outflows, which collects about 1% of GDP annually) than offsetting measures to fight evasion and narrow exemptions.

“These measures may face resistance from interest groups, Fitch says. “Ecuador's 2019 tax reform was heavily diluted during the legislative process. Without revenue increases, more of the EFF-required 5%-of-GDP fiscal adjustment would need to come from spending cuts. This could encounter political and popular opposition amid the social fallout from the pandemic and after many years of cuts, already evidenced by the backlash to (and backtracking on) energy subsidy cuts in 2019.”

VALE LEADS LATAM MARKET CAP AGAIN

Brazilian miner Vale has again become the valuable company in Latin America, with a market cap of $103.8 billion, more than $20 billion higher than Argentine e-commerce company MercadoLibre, which had gained the top spot in August 2020, according to Economatica data

MEXICO LEADS LATIN AMERICA INTELLECTUAL PROPERTY RIGHTS

Mexico leads intellectual property (IP) in Latin America and Venezuela is the worst both in the region and worldwide, according to the latest International IP Index from the U.S. Chamber of Commerce that measures IP in 53 countries.

The index evaluates the IP framework in each economy across 50 unique indicators which industry believes represent economies with the most effective IP systems. The indicators create a snapshot of an economies overall IP ecosystem and span nine categories of protection: patents, copyrights, trademarks, design rights, trade secrets, commercialization of IP assets, enforcement, systemic efficiency, and membership and ratification of international treaties.

MISERY INDEX: GUYANA BEST, VENEZUELA WORST

Guyana leads the world when it comes to the best performance on the latest Hanke Misery Index developed by renown economist Steve Hanke, professor of applied economics at Johns Hopkins University.

Hanke's misery index (HAMI) is the sum of the unemployment, inflation, and bank-?lending rates, minus the percentage change in real GDP per capita. Higher readings on the first three elements are “bad” and make people more miserable. These “bads” are offset by a “good” (real GDP per capita growth), which is subtracted from the sum of the bads. A higher HAMI score reflects a higher level of misery.

“Guyana takes the prize as the world’s least miserable country,” Hanke wrote in National Review. “Guyana literally struck oil, and its percentage change in real GDP per capita in 2020 soared by a stunning 25.8 percent. Since Guyana’s huge increase in real GDP per capita represents the “good” component of the HAMI and is subtracted from the three much smaller “bad” components, Guyana’s resulting HAMI score is negative. A negative HAMI equals happiness.”

Meanwhile, Venezuela holds the inglorious title of the most miserable country in the world in 2020, as it did in all five preceding years.

“The failures of president Nicolás Maduro’s corrupt, socialist petroleum state have been well documented,” Hanke writes. “But behind the shroud of secrecy that Venezuela has drawn over itself, significant changes occurred within the components of HAMI during 2020. Inflation, while still the world’s highest, plunged from 7,374 percent per year in 2019 to 3,713 percent in 2020. But the unemployment rate surged from 24 percent in 2019 to 50.3 percent. Both the bank-?lending rate and real GDP growth per capita remained about the same in 2020 as in 2019.” 

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