Ecuador finally signed an Extended Fund Facility agreement with the IMF, which will help the country return to a more sustainable economic model over the next three years. The IMF will provide $4.2 million of gradual financing during the life of the agreement, and other multilateral organizations, including the World Bank and the IDB, will disburse an additional $6 billion. Some of this money will help strengthen the current weak status of social indicators in education and health, as stated by President Moreno.
The agreement also requires an adjustment in expenditures ‒ especially of public wages and salaries, which must reach $1000 million by 2021 ‒ among other structural changes, including a tax reform to be submitted to the Assembly in October 2019 and reforms to the labor code. It should prove difficult to raise political consensus for either reform, so the IMF is judging political risk as high when assessing compliance with the agreement.
The government’s policy plan includes several objectives, the most important of which are putting public debt on a downward path, promoting prosperity for the poor and vulnerable, achieving a better medium-term fiscal framework, supporting a resilient financial system, and reducing labor market rigidities and improving competitiveness.
The government has also committed to achieving a 3.5% overall surplus for the Non-Financial Public sector by 2021, which will in turn reduce financing needs and the debt-to-GDP ratio. According to the assessment of the IMF, a 40% debt ratio is consistent with a risk tolerance level and debt distress probability above 10% (and below 15%) for the next six years, so the IMF recommends a ratio of 30%. However, despite the challenging deficit commitments, such a level would not be reached before 2023.
The required adjustments will cost Ecuador in terms of GDP performance and unemployment for at least the coming three years. The outlook for 2019 is close to 0% real growth, improving to 0.5% by 2020 and to 1.2% by 2021, subject to a benign global environment, including oil prices that do not fall below $45/b.
In the political arena, our past assessment that Correa is not dead was proven true by the results of the local government elections that took place on Sunday, March 24. The new party supporting Correa (List 5) won the presidency of the Province of Pichincha, with Paola Pavon ending up just 2% below the newly elected mayor of Quito, Jorge Yunda with Luisa Maldonado.
On the other hand, the Social Christian party consolidated its power in Guayaquil with the election of Cynthia Viteri as mayor, and it also won close to 50 other local government positions across the country. This result creates a strong platform for Mayor Jaime Nebot as a presidential candidate in 2021.
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