Emergency plan cut with a political scalpel
The government issued an emergency plan that expects to raise $2.26 million coming from a $1.4b reduction in expenditures in goods and services ($800 current and $600 capital), an increase of 0.75% in the retention of income tax ($420 million), a 5% one-time tax on vehicles above $20,000 ($220 million), and a temporary reduction of public servants’ salaries ($226 million).
Reactions to the measures vary from blunt opposition by certain legislators, including CREO and Correistas, to criticism from analysts who consider the measures too light and a lost opportunity to implement a more rigorous correction to structural problems. Even though we agree with the latter view, we are also aware of the social and political limitations of a weak government that probably fears another social protest such as the one we faced in October 2019.
Minister Martinez also announced negotiations for $2.2b in loans coming from various sources, including China. $1.4b will be obtained from the cancellation of $400 million of an existing bilateral loan, leaving the government with $1b net, and the remaining $0.8m will come from China which, in the context of an expected delay of disbursements under the IMF program and the impossibility of issuing debt in the international markets, will once again play a critical role in Ecuador’s financing.
Although President Moreno met with the director of the IMF mission – a good sign that shows continuous support from the Fund – problems closing the fiscal and international reserves numbers of 2019 are evident. Thus, the IMF just sent a fact-finding mission to review these results prior to the official review and a statement from IMF on the future of the program.
In the meanwhile, Ecuador has been losing an average of $8 million per day due to the debacle in the oil markets. Official estimates suggest an annual loss of $2.2b if the average price closes at $33, while the loss could be around $1.0b if prices average $45.
We have used this last price to make our corrections to the 2020 budget and have included what we think is plausible to achieve under the proposed economic measures. Our estimate for the 2020 deficit is $4.5 billion, which together with amortizations, imply financing needs of $9,555 million assuming that the remaining needs of $5.0b (CETES, past budgets liabilities, arrears, and other) can be rolled over by the government. Even if the full credit announced by Martinez becomes a reality, the government will still have to identify around $800 million, of which $300 million might come from an emergency line from the IMF, which is independent from the program.
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