Ecuador: Government announces relief measures amid oil price and coronavirus shocks; external debt challenges mount
Public finances were already tight before the outbreak of the coronavirus pandemic, which, combined with the crash in oil prices, is battering Ecuador’s economy and will reduce a large chunk of its fiscal and export revenues. Moreover, Covid-19 and the associated confinement measures restricting commerce and movement has added further fiscal stress. In response, over the course of March and beginning of April, the authorities laid out several economic measures to cushion the fallout from these shocks.
First, in a bid to mitigate the impact of the oil price shock, on 10 March the government announced an austerity package aimed at generating USD 2.2 billion in fiscal savings, including higher income taxes for firms in selected sectors; a budget cut of USD 1.4 billion; as well as new financing and refinancing of some current obligations, worth around 2.5% of GDP. Moreover, monetary support and distribution of food packages for vulnerable families, the postponement of payroll contributions for firms and the creation of a USD 50 million credit line for SMEs were also announced.
Meanwhile, after receiving pressure from the National Assembly to suspend payments on the external debt and prioritize health spending, on 8 April the authorities asked its creditors to defer interest payments on external bonds until mid-August; two days later, President Lenin Moreno announced the government intended to restructure the external debt. In light of this, the three major credit rating agencies downgraded the sovereign’s debt, highlighting the increased risk of default: Fitch Ratings downgraded it from CC to C; Moody’s lowered the rating from Caa1 to Caa3 and changed the outlook to negative from stable; while S&P Global Ratings downgraded the rating to ‘SD/SD’ from ‘CCC-/C’.
The president also announced on 10 April a new set of economic measures to mitigate the crisis, including temporary taxes for firms earning more than USD 1.0 billion and workers earning more than USD 500 monthly aimed at boosting cash transfer programs. Lastly, the government will also send a set of reforms to be approved by the National Assembly, including the prohibition of evictions due to delays in paying rents, healthcare coverage, and the expansion of the unemployment insurance, while also seeking new multilateral funding to provide liquidity to domestic firms.
Commenting on the measures implemented, Tiago Severo, an economist at Goldman Sachs, noted:
“The measures may provide needed relief for liquidity/credit strapped businesses and individuals during the current challenging circumstances, but they are unlikely to meaningfully alter Ecuador’s bleak outlook. The country is facing a “perfect storm” represented by the combination of three interrelated negative shocks: the outbreak of the coronavirus epidemic at home, the plunge in global oil prices, and the shutdown of private external funding sources. Meanwhile, a large landslide has temporarily halted the operation of Ecuador’s oil pipelines. Against this backdrop, we believe it would be very difficult for the government to commit scarce fiscal resources to keep servicing debt obligations. Hence, among other things, we expect the authorities to request a “holiday” on coupon and principal payments to private and official creditors for the remainder of the year, and possibly until the next administration comes to office by mid-2021.”