Costly to Sovereignty
Central Bank President Diego Martinez continues to deny that Ecuador is experiencing an economic crisis, and prefers to call the 3% of GDP plunge in Q1 a “cooling down of the economy,” due mostly to external factors.He also seemed confident that H2 would bring recovery, and only 2.5% shrinkage, against the 4.5% projected by the World Bank and IMF. His opinion was backed up by Finance Minister Fausto Herrera and Economy Minister Patricio Rivera.
But the economic activity and consumer confidence indices, in July continuing to fall dramatically (as they have since 2015) contradict this optimism, as does a poll conducted by the Central Bank itself, showing that only 14% of Ecuadorian firms consider H2 a good time to get a loan.
There are some positive signs, though. Unemployment and underemployment fell by around 0.8% between Q2 and Q3. And bank deposits changed by 2% m/m in June, and 5.6% cumulatively since January.This is allowing banks to increase their credit supply by around $800 million to $10 billion for the next half. Finally, the oil price in June at $36.9 per barrel is at its highest since November 2015. This seems particularly important for a country in need of large amounts of financing, as it seems markets look almost exclusively at the price of oil to gauge Ecuador’s financial stability, while protecting their investments with double-digit bond yields.
Managing scarcity is new to this government. However, it has reacted as governments in the past, which Correa had harshly criticized for “putting debt before life. ”The need for funds to finance heavy public expenditure has not decreased as expected. Financing the reconstruction of the natural disaster, and paying Chevron $112 million and Occidental close to $1 billion, after losing two international lawsuits within a year, has forced the government to service external debt on time. It has even delayed payment to domestic suppliers, and recognized its legal obligations, albeit justifying payments as the only alternative to “avoid [having] the country go bankrupt, because companies would have seized assets and accounts,” as Correa himself stated. All those obligations amount to over $3 billion – liabilities that are not registered as debt under the current total of $36.6 million, close to 37% of GDP.
Thus, kicking Occidental out of the country, conducting a controversial debt buyback in 2009 and underestimating the importance of foreign investment’s contribution to development has proven very costly to Ecuadorian sovereignty.
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