Following the right path, albeit too slowly

ECUADOR - Report 18 Sep 2018 by Magdalena Barreiro

Ecuador is one of the countries facing a humanitarian crisis of large proportions brought on by the massive exodus of millions of Venezuelans escaping from heart-breaking living conditions. Last week, President Moreno, represented by Minister of Foreign Affairs Jose Valencia, led an international summit to discuss this situation, which has no short-term solution and requires joint action from all the affected countries. Unfortunately, Venezuela, instead of sending its delegate, has threatened to sue Ecuador for “inventing a non-existent crisis” as Vice President Delcy Rodriguez put it.

While that lawsuit – if effective – will bring no consequences other than deepening the wedge between Presidents Maduro and Moreno, Ecuador will face economic consequences derived from the ruling of the International Arbitration Court of the Hague against it in the Chevron case. The economic compensation has not yet been defined, and it will take several months before an amount is settled. But Ecuador will have to add this compensation to the $112 million it already paid this company in 2016 “to avoid the bankruptcy of the country,” as Correa put it at that time.

In the meanwhile, Finance Minister Richard Martinez continues his efforts to raise the financing necessary to close the fiscal gap for 2018. The deficit, at around $900 million as of the end of August, continues to be half that of 2017. Nevertheless, the government will have to raise nearly $1.7 million of domestic debt between September and December if it does not want to return to the external markets, which remain reluctant to grant Ecuador a truce in country risk assessment, despite the country’s efforts in the right direction, which are probably perceived as insufficient.

A recent repo operation with Goldman Sachs allowed Martinez to bring in $500 million, which will help fiscal liquidity directly as other newly secured financing from the IDB (close to $490 million) and CAF ($150 million) are linked to projects. The repo operation, albeit with a lower interest rate than current sovereign bond yields, required collateral of 140% of the notional.

The terms of the repo operation have brought criticism from some analysts and have raised some eyebrows in the markets. However, we think there are some positive aspects. The operation is registered as contingent (and we assess a low probability of default) and will not increase the debt balance, the financial cost is lower than the yields for sovereign bonds, and the operation has no gold collateral, which is a sensitive political issue.

The budget for 2019 will be submitted to the Assembly at the beginning of November while conversations with the IMF continue. Thus, we await new information in order to better assess the coming year.

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