Three challenges for the economy of Ecuador this 2023

Although Ecuador is going through a positive macroeconomic moment, with fiscal accounts in order and one of the lowest inflation rates in Latin America (3.74% as of Dec. 22), there are at least three challenges that it will have to face this year to improve its situation and boost pending indicators such as employment. And these are:

• Financing and budget execution
• Internal liquidity level
• Lack of investment

But the main difficulty that the country has to overcome these issues is the political issue, since the relationship between the Executive and Parliament is not improving, and that prevents the legal reforms that are necessary to prop up economic issues.

Likewise, Ecuador is at the gates of an electoral process that will take place on February 3 and that will be decisive for the future of the Government. The results of the sectional elections (mayors and prefects) and the referendum proposed by President Lasso will send a powerful message to international markets and investors.

This is what the economic analyst Santiago Mosquera considers, who in a conversation with Bloomberg Línea explained that “the political is very strong and the uncertainty in the midterm of President Lasso generates a lot of concern among investors to decide to come here or expand their investments.”

That is why he believes that the country requires “minimum political reforms that would be attractive to investors,” in addition to “eliminating the ghost” of a new social mobilization like the one last June, which would deal a withering blow to the economy.

In this sense, the also dean of the UDLA Business School delves into the challenges for Ecuador this year and we detail them below.

FINANCING AND BUDGET EXECUTION

Although Ecuador has made good progress in a fiscal consolidation strategy with good results (1.7% fiscal deficit by 2022), low budget execution has put liquidity levels “in a weak position.”

Until last year, the fiscal consolidation strategy was part of the commitments with the International Monetary Fund (IMF) within the financing program that ended precisely at the end of 2022. Hence, it would be expected that from now on the Government spends or executes a little more than the budget, but for this the main thing is to have the sources of financing.

For Mosquera, this is the main challenge, since according to the Budget Proforma, the financing needs amount to US$7.577 billion and, although the Ministry of Finance has ensured that they are covered, there are some sources that are not very clear.

“There are some income categories that I don’t know if they will actually materialize, for example, there is a monetization of assets of a little more than US$ 1,000 million,” says the analyst while insisting that “the great challenge” it is to have clarity “where those resources are going to come from”.

In addition to the multilateral ones, the exit to the international markets for “more or less US$ 1,000 million at some point in 2023” would be considered, although this decision continues to be risky, since the country risk remains high and the interest rates interest would be onerous, bordering on 12% or more.

From what is known so far, the resources will come from:

• External debt: US$2.477 billion
• Internal debt: US$3.744 billion
• Internal liquidity

Mosquera points out that, unlike in 2022, internal liquidity levels for this year will be “much more restricted”, which would hinder the Government’s intention to increase financing through domestic debt, as it has announced.

“I don’t see that there is liquidity domestically so that investors, including institutions of the private financial system, are interested in taking on new domestic debt voluntarily,” says the economist.

The budget states that US$3.744 billion of the total financing will come from domestic debt, but there is still no clarity about the entities that will buy that debt, since the only state institution that could do so is Social Security.

INVESTMENT

Ecuador has great needs for local and international private investment to generate employment. And although the Executive has launched a series of initiatives to attract capital, almost none have materialized so far.

For this reason, Mosquera maintains that perhaps the most important element going forward “is that the Government effectively guarantee certain conditions that allow investment, both domestic and foreign, to begin to land in the country.”

With this it would be possible for the private sector “to be again the engine of growth in the economy of Ecuador and not the public sector”, specifically considering that the latter lacks the necessary resources to boost employment.

Precisely, this last indicator is also worrying within the national economy, since barely a third of the population has full or adequate employment. To which is added that the levels of underemployment and informality have grown.

The reduction in the rates can also be attributed to the fact that companies have automated certain processes, have moved towards digital channels or have made improvements to their production processes.

For this reason, “the only way to solve this is the creation of more companies and this is connected not only to Ecuadorian initiatives but also to direct foreign investment flows that unfortunately are not arriving.”

In other words, everything is connected “and if we don’t do enough to attract those investments, the investor goes elsewhere.”

POLITICS, THE STONE IN THE SHOE

As indicated at the beginning of the note, whether Ecuador improves its economic projections, which go beyond GDP growth, will highly depend on the political issue, so it would be expected that the main actors -such as the Assembly and the Executive- reach minimum agreements that allow a better flow of investment, as well as better conditions to obtain beneficial external financing.

“The political is what has us stuck, but the economic situation of the country is quite good, we have growth between 2% and 3%, we have the best inflation levels in Latin America and a surplus in the accounts… the macroeconomics is not the problem ”, reflects Mosquera.

What he urges is that the country convey certainty and assure investors that the rules of the game will not change, but at least until the February elections pass, that message will have to wait.

With information from Bloomberg