How does the high country risk -which has already exceeded 1,500 points- affect the Government, companies and citizens?

He increase in country risk in Ecuador, indicator that is measured by the investment bank JP Morgan, affects various levels: the Government, the productive sector and the citizen.

Ecuador is currently experiencing a strong increase in country risk. Before the elections, this indicator -which measures the market’s perception of whether or not a country is at risk of failing to comply with its international obligations- was located at 1,120 points and as of February 7 it rose to 1,514 points. That is, 394 additional points, in five days. This means that international markets consider that there is now a greater risk of Ecuador defaulting on its debt obligations, which will become more demanding as of 2025.

Although the general public considers this indicator very distant, it can affect them, both in terms of employment and less access to credit, say several analysts.

But how does this happen?

It is a whole chain of intertwined elements.

For Alberto Acosta Burneo, editor of Weekly Analysis, citizens should care about country risk because this affects the access of international capital. International resources become more expensive with a higher country risk and become restrictive. In turn, the lack of capital prevents further development of underdeveloped countries like ours, which should build infrastructure to continue growing. “Having a high country risk is equivalent to having problems accessing financing, or -as in the case of Ecuador- not having access,” he says.

It is that if the Ecuadorian Government wanted to have fresh capital, through a debt operation in the financial markets, should pay between 20%. This is because today the country risk is already at 1,514. This is equivalent to a rate of 15.14%, but to this is added the value of United States bonds, which are at 4.75%.

Thus, by having less access to capital, the economy will grow more slowly, which results in less generation of employment. Citizens then have less access to jobs.

On the other hand, from the private sector, companies are also affected by the high country risk. “Uncertainty infects the productive sector,” says Acosta. The biggest risk country makes access to international credit from banks and cooperatives more expensive. From what is known, the average cost of funding for banks in the productive sector it is 11%, which is less than what it costs the Government, but it is higher than the rates set by the Financial Regulation Board. This leads ton financial exclusion of certain sectors where the ceilings are lower than the international cost.

Acosta Burneo recalls that Ecuador’s financing needs in 2023 are $7 billion and given the lack of access to the external sector, then the Government will have to seek liquidity within the country. In this sense, it has already been said that the Government will seek financing from the Ecuadorian Institute of Social Security (IESS), but also with private banking. Thus, it will compete for liquidity within the country, which ultimately pushes rates up.

Along the same lines, according to Marco Rodríguez, executive president of the Association of Private Banks of Ecuador (Asobanca), a high country risk makes international funding more expensive, which affects all sectors of the national economy: companies, public sector, private sector, financial sector, among others.

He explains that external financing has been an important ally for credit growth. Since the start of the pandemic in 2020, the private financial system brought more than $1,415 million of fresh resources from abroad for new credits. An important part of these resources has been allocated to sustainable loans, focused on social financing, that is, for gender, micro, small and medium-sized companies led by women; also for green financing. Thus, it is understood that with a restriction on this type of international financing, these credits will also be affected.

The problems of access to credit are ratified by Luis Eduardo Naranjo, economic director of the Quito Chamber of Commerce. Naranjo regrets that Ecuador is once again in third place among the countries in the region with the worst country risk, after Venezuela and Argentina. He states that what happened with the elections, both with the referendum and with the sectional authorities, makes it possible to foresee more stoppages, protests and, in this context, that the government may not end.

Thus, investors perceive that the trend will change in the next government and that this will represent a return to a left-wing government and therefore a change in the economic model. Remember that in 2025 and 2026 the payment of the restructured bonds begins and all this raises the risk expectation that those payments will not be made.

As for the companies, the The main affectation is the lack of credit, says Naranjo. This is because the banks, which are the ones that lend to companies, have greater restrictions to bring international credits with a high country risk. Additionally, since Ecuador does not have the regulatory possibility of increasing credit rates to real market values, then what they do is restrict credit.

For the citizen, says Naranjo, the affectation can come from the employment side. “Given the unstable situation, many of the investments and liquidity injections are going to stop, and at the moment it stops there are also fewer jobs.” (YO)