Fighting to survive
The title of our most recent quarterly was "Year 2020: More of the same amidst a complicated political situation". We were not expecting Covid-19. Ecuador has been under strict norms of social isolation for over a month. A few economic sectors are continuing with varying levels of activity, but firms of all sizes are facing virtual bankruptcy if they cannot negotiate an agreement with their employees. Thirty-eight percent of the Ecuadorian population does not have an adequate job, and a large part of this group live day to day from commerce on the streets. They are facing a life-threatening situation. Hundreds of new orphans are emerging in Guayaquil after both of their parents died of Covid-19, and even though the virus is slowing its fast pace of contagion, Ecuadorians do not see the light at the end of the tunnel just yet.
A government whose fiscal trajectory has been flat for more than three years and is facing major external debt commitments this year has the trade-off of paying this debt to avoid a complete financial shut down − a situation that would be catastrophic as Ecuador depends at this time almost entirely on external funds − or reducing the funds destined to combat the health crisis that is threatening the lives of many and making the political situation unmanageable.
In an effort to avoid this scenario, last Friday the government sent two bills with the character of economic urgency, which forces the Assembly to vote within 30 days. The first is the Financial and Monetary Sectors Reform, pending since October to comply with one of the requirements under the agreement with the IMF. The other is the Humanitarian Support Bill, which proposes an important contribution from the private sector in the form of salary contributions from individuals or profit contributions from firms.
The bill immediately raised opposition from a significant number of legislators and from representatives of the productive sector. Some unions also objected to the starting salary for contributions ($500/month). Yet many individuals, publicly or privately have expressed their support of the law, understanding the predicament of the country. Monies coming from this contribution will go to a trust account managed outside the public sector and will not increase the number of dollars in the economy, nor imply higher revenues for the budget. This is a distributive law that aims at transferring funds from those who have the means to those who have nothing, and from stronger firms to weaker firms that are facing bankruptcy that would create even further job destruction.
Ecuador received one piece of good news last week. Most bondholders accepted the Republic’s petition to review the terms of the outstanding debt. We can only hope that as a result, a win/win decision is negotiated by a government that, albeit with its limitations and mistakes, is doing its very best to keep the country going.
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