For developing economies with high credit risk like Ecuador, borrowing costs are 9 times higher. This complicates public and private finances
In August 2020in the midst of the first blow of the pandemic, the Government of Lenín Moreno had to renegotiate the external debt in bonds because Ecuador did not have the capacity to pay the maturities and interest on that debt.
The international community gave the country four years to recover, clean up its accounts and begin paying the restructured debt.
However, Ecuador did not do its homework, the fiscal deficit (more expenses than income) remains high, it has a large account of arrears or non-payments at home, and its small formal productive sector continues to assume “one-time contributions” and more taxes.
Since Ecuador has been a republic, it has defaulted on its foreign debt on more than a dozen occasions and Public finances apparently recover when oil prices are high; but then the crisis explodes in an inefficient public sector.
All this panorama means that the country, according to the investment bank Moody’s, has a credit rating of Caa3.
This qualification, in the context of access to credit, represents a very high risk for investors.
That is to say, Ecuador is considered an economy with poor credit quality and that faces high probabilities of default.
The cost of not being subject to credit
When a person seeks to obtain credit, the bank evaluates not only that person’s income, but also his or her credit history and the likelihood that he or she will repay the debts if granted a new loan.
In the same way, when Ecuador seeks to borrow from national or foreign investors, its credit profile is evaluated. The Caa3 rating indicates that the probabilities of default are very high and that makes it too expensive to issue external debt bonds in international markets.
Neighboring countries like Colombia and Perulike other developing economies without Ecuador’s credit problems, have been able issue bonds at a low interest rate (less than 5%) in the long term and thus refinance your debts without problems.
According to a recent analysis by the World Bank (BMI), For economies like Ecuador, which have the same level of credit risk as Pakistan and Ethiopia, borrowing costs are 9 times higher.
Thus, for example, a country like Peru, where despite the crises, orderly fiscal management is respected and private investment is truly encouraged, the total cost of paying a loan of $100 million dollars with an interest rate of 4% Over 5 years it would be approximately $110.5 million. This because Peru has a low credit risk and a country risk of ????
In the case of Ecuador, even with the drop in country risk to 1,489 points, that same credit would cost more than $160 million dollars.
Cold cloths in extreme situations
Ecuador averages one tax reform per year, where only cold cloths are put on to get out of the problem in the short term; but without fundamental solutions.
In the case of the Government of Daniel Noboa, in less than 3 months, three laws with tax changes were approved. The last included the increase in VAT to 15% and some temporary taxes.
The underlying problem is that, on the other hand, according to Aníbal Vera, economist and former consultant to international organizationsthe public spending structure is left almost untouched and no fundamental reforms are undertaken to boost investment and employment.
“Ecuador needs a truly structural tax reformwhich eliminates inefficiencies and taxes that generate almost no revenue, and which enhances other taxes along with a push for formalization. This reform, through the commitment of political, business and social sectors, must last at least 10 years without new patches.”, he pointed out.
The same, according to Vera, should be done to restructure public spending and really establish priorities. Otherwise, you’re just kicking the issue around for later.
The worst thing is that, if the fiscal crisis is not resolved and in The economy is liberalized and deregulated so that there are more companies and more employmentEcuador will continue to march on the same ground and have to desperately resort to the International Monetary Fund (IMF) every two or three years to receive emergency financing. (J.S.)
Poorer than before the pandemic
Philip Kenworthy, an economist at the World Bank Outlook Group, has said that, amid a complex global situation with rising interest rates, “By the end of 2024, people in nearly half of developing economies with weak credit ratings will be on average poorer than in 2019, on the eve of the COVID-19 pandemic.”.
Thus, solving the fiscal crisis in a structural and sustainable way, not with temporary measures and without touching on inefficient spending, is vital for a country like Ecuador to become a good credit subject, for investors to find it profitable to come to the country and the scarce formal productive sector does not continue to be suffocated to pay for an inefficient State.
In 2023, interest payments on public debt increased by around $700 million and stood at $3.19 billion. By 2024, an additional increase of $439 million is expected to reach $3,629 million.
The cost of public debt, which is a consequence of high fiscal deficits and low oil revenues, is growing and will have important peaks in 2025 and 2026.
According to the latest public debt bulletin, the public debt of the entire Ecuadorian public sector, taking into account all obligations and liabilities pending payment, amounts to $79,432.01 million. This represents 65.68% of GDP.
This is the equivalent of each Ecuadorian, from the moment of birth, must pay $4,487.68 of the Ecuadorian public debt.
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