Moreno’s economic knock out
Moreno took many by surprise announcing an elimination of fuel subsidies instead of the expected VAT increase requested by the IMF to comply with a 1.5% of GDP increase in revenues for next year.This measure needs no approval from the assembly and would render results starting this month if the government remain firm in its decision and does not fall under political and social pressures.
In fact, Ecuadorians woke up to a convulsed panorama on last Thursday after President Moreno announced the news on Tuesday night, as representatives from the transportation sector and students from public universities blocked roads and streets of the country with burning tires leading violent albeit not surprising protests. President Moreno had to sign an executive decree declaring a state of exception and sending the military to patrol the major cities. However, this measure was not enough to prevent protestors from impeding fuel trucks reaching gas stations in Quito and other Andean cities leaving citizens not only without access to public transportation but without fuel as well.
The Correista group of legislators lead by Gabriela Rivadeneira former president of the Assembly threatened to start an impeachment process for the President.However, the origin of the request guarantees its future lack of success, and we do not believe it will reach any consensus.
The announced measures that include an ISD tax reduction for certain productive activities, the elimination of the income tax advanced payment and an increase of the welfare bonus as well as in the number of beneficiaries, among other changes in addition to the elimination of fuel subsidies, might render a net increase of revenues of $2,273 million per year to the fiscal sector.Our estimate is more conservative at $1550 million without a reduction in salaries of the public sector, and of $1900 million if the government is successful in adjusting this item by $400 million as stated by minister Martinez.
Amidst this social convulsion, the Central Bank published information that shows a quarterly recovery of GDP in Q2 from a negative change of 0.9% in Q1 to a positive 0.4% in Q2, and albeit y/y growth shows a downtrend from Q1 it is also positive at 0.3%. This are not bad news considering that public investing which has been a major engine of Ecuadorian growth in the last decade contracted around $1b y/y in H1 2019.
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