The months of uncertainty that Lasso has left can be transformed into a maelstrom of spending and campaigning with the next government of a year and a half. The economy suffers havoc.
The economy is based on trust and certainty, both to invest and to create employment. However, with the death cross and early elections, a stage of uncertainty and mistrust is established for Ecuador.
From the side of international investors and investment banks, two stages are projected that go from paralysis to the permanent campaign; where instability is not resolved with the election of a new government to administer a state in crisis for a year and a half.
Through a latest report, Moody’s Investors Service’s, which is a US investment bank, determines that the cross death marks the beginning of a period of “great uncertainty” both political and economic.
paralysis
Moody’s points out that the outcome of the call for early elections is not clear, due, first of all, to the fact that this is the first time that this scenario has occurred in Ecuador.
Secondly, according to Jaime Reusche, vice president of Moody’s, uncertainty is deepening because the entire national political class has low approval ratings.
This situation “will cause a paralysis of the economic agenda”; despite the fact that the Government of Guillermo Lasso can issue economic emergency law decrees until a new president is elected.
These decree laws, as LA HORA has already analyzed, must be limited and not aim at structural changes.
But, in addition, its validity not only depends on the approval of the Constitutional Court (CC); Rather, they can be radically modified and even repealed by the next Assembly to be elected during the first round of elections on August 20, 2023.
Thus, the rules of the game issued during the period prior to the early elections can come to naught in a short time.
The result is that big economic and investment decisions are put on hold; with which works and projects are delayed with a direct blow to the economy.
permanent campaign
After passing the stage of paralysis until the early elections, the situation will not necessarily improve because, with a horizon of barely a year and a half in office, the next president (whoever he is) will have all the incentives to dedicate himself to a permanent campaign. The objective will be to be the first in the race to opt for a full presidential term in 2025.
In this context, international markets and investors fear that the new president will embark on a wave of uncontrolled increase in public spending and greater borrowing at high interest rates.
That mixture can produce increasing popularity in the short term; but economic and social problems in the medium term.
“The materialization of these risks, together with our long-standing concern about future payment capacity, will continue to affect Ecuador’s credit quality and increase investors’ perception of risk,” Reusche said.
The recent history of Ecuador, during pre-electoral periods, indicates that the governments in office trigger the fiscal deficit with a view to staying in power.
Thus, for example, during the correista decade, during the election years, the fiscal deficit (more expenses than income) fluctuated between $6,000 million and more than $8,000 million.
This type of imbalance, which can be replicated with a candidate government for a year and a half, causes forced adjustments, a drop in public investment, tax reforms with higher taxes and an economic crisis in the medium and long terms.
Roberto Domínguez, economist and international consultant, pointed out that the accumulation of public waste is one of the main factors that scares away investment because it is known that imbalances are paid for with abrupt changes in the rules of the game: more obstacles and costs to undertake and produce . (JS)
El historial de mal pagador (11 veces desde que es república), junto con la inestabilidad política y económica, hacen que la calificación crediticia de Ecuador sea Caa3, es decir alto riesgo para el financiamiento y la inversión.
El total de deuda externa que se debe pagar en 2023 es de $3.036 millones.
Go back to old practices
According to Fidel Jaramillo, general secretary of the Latin American Reserve Fund (FLAR), one of the main fears at the international level, during the transition of a year and a half until the 2025 elections, is that a legal change will be made that will allow the Bank to finance Central to the Government.
“It would be a significant risk, threatening the stability of dollarization itself,” he said.
In other words, the economy would go back to the old practices of using the Central Bank as petty cash for public spending, under the discourse that the country’s needs are urgent and money cannot be kept.
However, a brake on the escalation of spending could come from the reality that Ecuador has restricted access to loans, even from multilateral organizations, and other sources of financing could be too expensive.
‘Instability in the country compromises Quito’s investment plans’
Eight days after being sworn in as mayor of Quito, Pabel Muñoz has expressed concern about the political instability that Ecuador is experiencing, after the death cross was decreed and, with that, anticipating the elections.
The impact – Muñoz highlighted – is linked to foreign investment plans for the capital.
“I made efforts before entering (mayor’s office). I visited New York (United States), I visited Mexico, I was in Colombia, in all announcing the investment project of the city. But of course, the investments that want to arrive later ask themselves: ‘but there is a dead cross there, it is convenient or not convenient,’” he said.
Muñoz, who is considered one of the strongest profiles of Correísmo, ruled out leaving the Mayor’s Office, for being a presidential candidate. “I am the mayor of Quito and that is my plan for the next four years,” he added. (AVV)