After much ordeal, fiscal bills are passed
The National Assembly approved both the Humanitarian Bill and the Ordering of Public Finances Bill after days of hot debate and even within the request of Correistas and Social Christians to archive the second bill. While the approval of the Humanitarian Bill introduced major changes eliminating private contributions to help finance the needs of the pandemic, the Ordering of Public Finances was approved with no substantial changes, maintaining most of its original spirit and providing a small but important triumph to the weak government of President Moreno.
Without contributions and individuals that might have summed over $1.2b, the government will have to make an additional effort to find the resources to cover over $16b estimated to save and preserve lives, as well as to resuscitate a seriously affected economy, with GDP that might decrease 6% to 8% this year. In this context, President Moreno announced bold measures that include a cut of $4.0 billion in expenditures. He also announced a new attempt to eliminate oil subsidies except for vulnerable sectors as agriculture and transportation, allowing a dirty float of prices and opening imports to the private sector. We hope that the social reaction of last October does not repeat itself, jeopardizing the opportunity to make these important changes.
The negative effect of the pandemic on non-oil exports was not yet evident in Q1 2020. In fact, non-oil exports increased by 17.6% y/y while imports of the sector decreased 11.8%. On the other hand, oil exports were down 24.9% and oil imports fell 6.7%. These results, together with a change in the composition of the balance of trade in which the non-oil sector represents almost 72%, are behind the total surplus of $604 million after a deficit of $43 million in Q1 2019.
The fiscal reality is quite different. After a review of the figures of the Non-Financial Public Sector that led to a stall in the IMF program, new information (approved by the Fund) reveals a deficit of 2.8% of GDP in 2019 versus the expected 1.1%.
Negotiations with the IMF continue, and a new agreement, most probably in the form of a one-year stand-by arrangement, might be ready by August or September. This will entitle Ecuador to a new disbursement that will help mitigate its critical fiscal needs. In the meanwhile, the IMF has disbursed $644 million from the emergency line to which Ecuador had access.
We have estimated two scenarios for the General Government deficit for this year. In the first scenario, the deficit might be close to $9 billion, with financing needs of $20.5b and a gap of over $5b. The second scenario considers extensive expenditure cuts, leaving a deficit of $5.3 billion, with financing needs of $17b and a gap of $1.7b.
In any event, the excruciating need for external net credit is evident. Thus, together with the negotiation with bondholders, the government must achieve a successful negotiation with bilateral banks and governments to restructure (not to default) debt payments, as in this category, net credit is marginal in 2020.
Now read on...
Register to sample a report