Nothing has been decided yet, but everything is being considered
The second quarter of 2018 ended with a small recovery in growth from Q1, but we do not think it is a convincing sign of a full economic recovery. Year over year GDP grew 0.9%, and quarter over quarter it is up 0.4%. Spending – both government and household – is supporting this upward trend, increasing 1.2% y/y and 2.7% q/q, respectively. But exports have shown a disappointing performance resulting in a negative value-added contribution of 0.05 pps, while imports reduced growth by 0.55 pps q/q in Q2.
Between January and July, oil production is four million barrels lower than in 2017, but oil prices rose from $42.72/b in 2017 to $61.27/b in 2018, boosting exports, which rose from $3466 million to $4550 million during this period.
Despite statements from President Moreno and Minister Martinez about their commitment to reduce expenditure in order to shrink the fiscal deficit, we still do not see the political willingness to attack the core problem of an oversized state at its roots. The adjustment in capital expenditure, which has fallen 40% year over year in the January-September period, has been severe, but current expenditures rose by 4.9%, of which salaries represented an increase of 3.5% in the same period.
By the end of Q2, there was a small surplus of $106.9 million in the balance of trade, and the current account deficit was lower than 0.1% of GDP. However, the structural problem of the external sector burst through the capital account and international reserves, with the latter swinging in response to foreign debt disbursements.
Despite a lower deficit of approximately 3.5% of GDP for 2018 (an attainable goal), financing needs for this year, including short-term paper (CETES) and other liabilities, amount to nearly $19.5b. The government still has a $900 to $1200 million financing gap without identified sources, and has an ambitious goal of raising $1750 million of domestic debt between October and December. Minister Martinez has affirmed that no financing source has been ruled out, and that the government is looking for the best options.
In this context, an agreement with the IMF appears unavoidable because it will help Ecuador raise some $10,000 million from multilateral institutions. However, Martinez denies there is one coming soon. Also, because 2019 will prove even more difficult than 2018 in terms of liquidity, the phantoms of a VAT hike and further subsidy reductions are floating in the air. Again, Minister Martinez, with the caution he always exercises, declared, “Nothing has been decided yet, but everything is being considered”.
Now read on...
Register to sample a report