Ecuador is bucking the global risk trend

Ecuador's capital Quito: Reaching new heights

Although Euromoney’s latest quarterly country risk survey of 174 countries is notable for the majority of nations (101 in total) that were downgraded because of inflation, the war in Ukraine or other fundamental problems – be they domestic or external – just as noteworthy are the 61 that improved, for one reason or another.

Medium-risk Ecuador is one of the most significant, and not just for its first-quarter upgrade – interesting and notable as that was – but for two bare facts.

One is its total risk score, which moved above 50 out of 100 for the first time. This is often more than symbolic, providing an indication that a country should be commensurate with investment grade. The other, endorsing the first, is the longer-term (five-year) trend improvement, which has seen Ecuador rise 40 places in the global rankings to a lofty 73rd.

That means Ecuador is barely a few places below Bulgaria, Hungary and Kazakhstan that are all rated sovereign-borrower investment grade, reinforcing the impression that credit-rating agencies presently awarding Ecuador a CCC+ (Moody’s) or B- (Fitch and S&P) should be considering upgrading.

And from a general investor perspective – in terms of project financing, acquisitions, or equity investments – Ecuador would seem to be offering returns that do not carry such enormous risks that they once did.

This comes at a time when the government is reminding investors it is open for business and is seeking to lure in foreign capital into various sectors, to exploit its minerals wealth, build physical and digital infrastructure or provide goods and services.

The pandemic, of course, played a big part in undermining the country’s ambitions in that regard, with a sharp fall in real GDP in 2020 of some 7.8%, contributing to fiscal distress and the government seeking assistance from the IMF in the form of an extended fund facility programme that has now completed three reviews.

Economic reform, such as strengthening fiscal management, central bank autonomy, tax reform and the legal framework to combat corruption, has been fundamental to improving economic policy credibility 

 - Mario Flores

Last year’s elections led to the free-market liberal Guillermo Lasso becoming president. He has considerable business and banking experience, but has a weak position in the legislature, with his party Creating Opportunities in a minority there.

The government must also eradicate gang violence in some provinces that is grabbing the headlines.

Despite this, his desire for stronger law enforcement to address corruption and drugs trafficking, pro-business reforms and efforts to accelerate the Covid-19 vaccination programme have won plaudits.

Survey contributor Mario Flores, an economist and international consultant specializing on Central and South American countries, notes the fact that more than 77% of the population aged over five are now vaccinated against Covid-19 and the economy is recovering from the devastating effects of the pandemic.

GDP increased in real terms by 4.2% last year and it is forecast to continue growing, albeit at the slower pace of 2.9% and 2.7% in 2022 and 2023, respectively, according to newly published forecasts from the IMF.

Consumer price inflation is seen decelerating from 4.2% in 2021 to 2.9% in 2022 – it fell from 2.7% in February to 2.6% in March – and the balance-of-payments current account is stable, and in surplus at around 2% to 3% of GDP.

The banking system also has a high level of liquidity (at 28%) and capital adequacy (17.1%), Flores notes, while stating that “economic reform, such as strengthening fiscal management, central bank autonomy, tax reform and the legal framework to combat corruption, has been fundamental to improving economic policy credibility”.

Another of Euromoney’s contributors for Ecuador is Aleksej Jevstafjev, who is also an independent expert.

He notes the fact that “at a time of fiscal consolidation, president Lasso still has a high approval rating thanks to the successful vaccination campaign”.

Despite lacking a majority in parliament, important pro-market legislation, like the tax bill, has been passed 

 - Aleksej Jevstafjev

Marking his first year in office, Lasso has announced a limited, but nevertheless noteworthy, cabinet reshuffle involving the defence, agriculture and energy portfolios ahead of oil-contract renegotiations with private companies.

Petroecuador has announced its willingness to cooperate with private companies to boost oil output and upgrade infrastructure.

“The public response seems to be muted so far and the change of oil minister [from Juan Carlos Bermeo to Xavier Vera-Grunauer] increases uncertainty, but it probably points to the continuation of the policy, as the former minister was replaced by his deputy,” says Jevstafjev.

“Moreover, despite lacking a majority in parliament, important pro-market legislation, like the tax bill, has been passed.”

The tax reform is viewed as a crucial element of the IMF’s financing programme, providing investors with various incentives, including a reduction in corporate income tax while also raising more tax from larger companies, individuals with large assets and middle-income earners.

The government estimates some $1.9 billion of additional tax revenue in its first two years.

Jevstafjev notes that the fiscal deficit was 1% of GDP in 2021, down from an average of 5% of GDP from 2015 to 2020, with a trade surplus of 2.6% of GDP that is not so much due to imports compression, with imports rising at a strong rate.

“The external balance has improved, not only because of oil prices, but due to lower interest payments to foreigners after the restructuring of government debt and normalization of tourism flows,” he says.

“As a result, international reserves increased from $1.6 billion at the bottom in 2020 to $8 billion currently, according to the IMF.”

There are some risks, of course. The latest IMF review has been delayed – partly due to the Russian invasion of Ukraine – and an investment bill to attract private capital was rejected by the National Assembly, highlighting Lasso’s difficulties legislating without a majority of party members behind him.

However, Jevstafjev points out that, thanks to higher oil prices, the IMF sees stronger fiscal sustainability as well as the capacity for extra public spending to take place.

In addition, public opinion is in favour of further reforms, including the investment bill, according to the polls.

The investment revival is essential to overall GDP growth, Jevstafjev says, as the capital-expenditure part of the economy is the weakest, with real gross fixed-capital formation down by 30% from its peak in 2014 and 15% from its pre-Covid level.

What seems clear, nevertheless, is that Ecuador is at least moving in the right direction. For now, it is one of Latin America’s stars.