The clock is ticking

ECUADOR - Report 17 Sep 2019 by Magdalena Barreiro

Low inflation rates of 0.14% (cumulative) and 0.33% (y/y), together with lower-than-expected tax collections as of September, and a large contraction in non-oil import growth, which fell from 16.6% to 2.2% as of July, speak of economic stagnation. The consumer confidence index also fell, to 36.2 in July 2019 from 38.5 in January 2018, with a brief recovery in April 2019 probably due to the agreement with the IMF.

Oil production is one of the few economic sectors that is doing better, with a rise in production to 531,000 barrels/day in the period from January-July 2019 from 516,000 in 2018. Export production also increased 9% y/y in the same period, making up for the decline of $4.2 per barrel in average price.

The exit of Santiago Cuesta, President Moreno´s advisor on economic issues until last week, will breathe fresh air into the government´s economic plans, releasing them from his continued interference. However, Cuesta was in charge of the private concessions project, and because he not only left but the position has been eliminated, we believe there will be delays, making it difficult for the budgeted $1000m in proceeds to be realized this year.

Therefore, our estimate for the year-end budget of a $3.6b deficit might be larger, forcing a large surplus from the rest of the non-financial public sector – mostly non-financial public companies´ operating results – to achieve the IMF floor of -$293m for the overall balance of the NFPS. Otherwise, the government will be in need of new domestic and international debt issuance.

Moved by vox populi, President Moreno is disagreeing with a VAT increase ​ and does not fully support public servants’ layoffs, thus the slow and small adjustment this year and the delay in submitting reforms. The general opposition to this increase has forced the government to think of some alternatives, one being increasing the taxes on fuel. With subsidies amounting to around $4.4b this year, this might be an acceptable alternative to the VAT proposal in order to continue with the IMF agreement. And the clock is ticking.

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