By Gideon Long
When Richard Martínez took over as Ecuador’s finance minister in May last year, the country’s accounts were a mess. President Lenín Moreno was picking up the pieces left by the previous leftwing government, which for a decade had financed Ecuador largely through opaque loans-for-oil deals with Beijing.
It was not clear how much money Ecuador had borrowed from China nor how many barrels of crude it owed in return. The country had turned its back on institutions such as the World Bank and the International Monetary Fund, relying instead on high oil prices to fund social programs. The fall in the oil price after 2014 had forced Moreno’s government back to the international market.
By the time Mr Martínez became finance minister Ecuador had issued $7.5bn of sovereign bonds in less than a year at eye-wateringly high interest rates. His predecessor as minister, a vestige from the old government, had lasted just two months in the job. Aged 37 and with no political experience, Martínez was something of an unknown quantity. But 14 months on, things look brighter.
Ecuador has secured $10.2bn in loans from the IMF and other multilateral lenders and is implementing a package of measures to reduce its fiscal deficit. With that deal in place, Martínez says the Andean nation, unique in South America in its use of the U.S. dollar as its official currency, is unlikely to return to the bond market for a few years.
“We don’t want to keep flooding the market with Ecuadorian paper,” he told the Financial Times in the country’s financial capital Guayaquil. “I can’t categorically rule out debt issuance, and if we need to do it for specific reasons we will, but it’s not the plan, neither this year nor next, nor until the end of 2021.”
About $4.2bn of the three-year lending package comes from the IMF as an extended fund facility. The rest comes from the Latin American development bank CAF ($1.8bn), the World Bank ($1.7bn), the Inter-American Development Bank ($1.7bn) and others.
Ecuador has received $2bn of the total so far. The rest is conditional on progress.
The IMF acknowledges its deficit-tightening measures will damp growth and predicts Ecuador’s economy will contract by 0.5 per cent this year before reviving slightly in 2020. Mr Martínez, though, is more bullish. “Our figures are more optimistic than those of the IMF. We think we’re going to grow this year — not by much but grow nonetheless — by up to one per cent,” he said.
He bases his optimism on recent data — gross domestic product grew by an annual 1.4 per cent in 2018 and 0.6 per cent in the first quarter of the year — and on a better than expected first-quarter tax take and a windfall from the reduction of fuel subsidies.
In the longer term, Ecuador is banking on increased foreign direct investment, particularly in the fledgling mining sector.
FDI was worth 1.4 per cent of GDP in 2018. The government aims to double it before leaving office in 2021.
Perhaps the most audacious target in the IMF package is on foreign reserves, which stand at $4.3bn and which have seldom in the country’s history risen to more than $5bn. The IMF wants Ecuador to hit that figure by the end of this year and take the total to $11.4bn by the end of 2021.
“It’s an ambitious target — I can’t deny it — but that’s the pledge we’ve made,” Martínez says.
Ecuador’s success in implementing the program will depend on the government’s ability to push labor and tax reform through Congress. Martínez said work on the tax plan was “quite advanced” and would be unveiled by October. It is likely to include an increase in VAT from 12 per cent, a measure which will be unpopular.
Critics of the IMF deal say it will hit Ecuador’s poorest. The Center for Economic Policy Research, a left-leaning Washington think-tank, said it was based on “grossly unrealistic projections” for FDI and would bring “lower GDP per capita, higher unemployment and increased macroeconomic instability”.
“Recent memories of IMF interventions in Greece and Argentina do not inspire optimism or confidence in the likelihood of the program’s success,” it said.
But Martínez says the short-term pain will be worth it to put Ecuador’s accounts in order and move away from the legacy of the previous government. “In any transition from a state-dependent economic model to a model centered on the private sector there will inevitably be some impact on economic growth,” he says.
Credit: Financial Times, www.ft.com