Political risks beat fiscal threats
We maintain our view that the political risks coming from the presidential election and the composition of the National Assembly will dominate next year’s performance because they will determine the fate of fiscal and domestic economic developments.
The political arena is not fully decided so far, as one candidate, Andres Arauz, has not yet been officially registered, and another new contender, Alvaro Noboa, is fighting to be accepted. Noboa represents another faction of a populist right that might divide both voters from Lasso and from Arauz. The National Electoral Council has already banned him from the elections, but there is a sentence pending from the National Electoral Court that might change his fate.
The trend of voters' intentions for the other candidates has not changed much since mid-October, with Guillermo Lasso and Andres Arauz leading the polls depending on whether the pollster is aligned with the right or left. But it is highly probable they will pass to the second round, followed by Yacu Perez in third place.
It is the growth of this last candidacy and the possibility of the significant number of legislators it might win due to the number of votes as well as to the distribution implied by the new mathematical method that will be used in 2021 (the Webster method) that worries us the most. Even though it is difficult to predict where those votes will go when voting for president, it is easier to predict that those legislators could be more aligned with proposals coming from former Correistas than with those coming from CREO.
We expect the General Government and the NFPS deficits to be lower than the estimates from the government and the IMF, but even in the case of this relative fiscal relief, the reduction of future deficits would have to rely not only on further contraction in expenditures, but also on an increase in revenues.
In fact, the General Government deficit as of October 2020 shows a reduction of 10% in current expenditures compared to the same period in 2019. Six percent comes from a drop in salaries and 28% from a fall in the purchase of goods and services. In addition, although total expenditure of $36,282 million from the NFPS represents around 38% of GDP, Social Security Transfers, derivatives, and the welfare bonus sum $11,914 million, leaving $24,368 million or around 25% of GDP as “adjustable” expenditures. Thus, the room for adjustment narrows significantly.
The agreement with the IMF states an increase in the VAT rate of around 2%. Will the new president and the new Assembly consider it? And most of all, will the society accept it without falling into the dangerous unrest of last October?
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