Why is Ecuador in the top 4 of the countries with the worst country risk in the region?

Ecuador is in the top 4 countries in the region with worst country risk. That Country risk, which measures the market’s perception of whether a country will comply with its external debt obligations, is key to accessing credit and attracting investment. The higher, the worse, because it is understood that there is a greater risk of default.

This week, after the elections that were unfavorable to the Government, Ecuador ranked fourth on February 6, rising to 1,415 points; while only countries like Venezuela, Argentina and El Salvador had worse results. However, day after day, On February 7, Ecuador climbed to third place in country risk, only after Venezuela (38,121 points) and Argentina (1,912 points), after the Ecuadorian indicator shot up to 1,514 points. In it ranking El Salvador followed closely with 1,418.

This February 8, on the other hand, there was a slight drop in the indicator in Ecuador, although in the ranking followed third: Venezuela with 38,353 points, Argentina with 1,919 points, Ecuador with 1,499 and El Salvador with 1,418. And on Thursday, February 9, the country risk indicator for Ecuador stood at 1,500 points, without losing its position on the podium.

On the other hand, these realities are far from the country risk of other neighboring countries of Ecuador such as Peru and Colombia or like other dollarized economies: Panama, for example.

But what are the common characteristics of high-risk and low-risk countries? What are the lessons that Ecuador can draw?

In accordance with Jaime Carrera, executive secretary of the Fiscal Policy Observatory (OPF), In general, there are at least two cross-sectional elements of the countries that have such a high risk. The first is that all have a solid history of economic and fiscal problems, with deficits and disarray in the fiscal accounts. In the special case of Argentina and Ecuador are countries that are used to getting into debt and then not paying the debts.

In case of The Savior, In Carrera’s opinion, which is also a dollarized country, it is an example of what should not be done for Ecuador.

ensures that President Nayib Bukele is destroying bank savings, and being a dollarized economy, he is destabilizing everything. He has announced, for example, the issuance of Volcán bonds, and with the digitization law it has given way to the use of bitcoins, all of this is destroying the economy.

On the other side of the coin are countries that have low country risk, even though they have social problems. For example, Peru. Despite the governance problems they have, on February 8 their country risk was at a level of 195 points.

Carrera explains that, in the case of that country, it was the Fujimorato (with all its problems in political management) that set the tone for responsible fiscal management and helped the country get out of the hyperinflation that had been generated by the government. by Alan Garcia. Currently, the GDP debt level is 30% or 35%, the Central Bank is autonomous. A very important point is that the population itself, the citizen, is aware of the need for fiscal order.

Panama, the other dollarized economy, is an example to follow, says Carrera. It is an economy that currently has a risk of 217 points. It is an economy open to the entry of dollars, which has a number of banks and which has managed to have a per capita income higher than that of Chile.

Santiago Mosquera, economic analyst and dean of the UDLA Business School, agrees that the basis for having a better country risk indicator is good performance and economic stability. It ensures that in the case of Colombia, Mexico, Chile, Peru, all have maintained good macroeconomic management, regardless of the trend of the government on duty.. “There are issues that are no longer discussed or touched on,” she says. Reduced deficit, independence from the Central Bank, keeping inflation low, among others. This, he says, is attractive to investors.

Whereas in Argentina, Venezuela, El Salvador and Ecuador the constant is a change in policies. He exposes, for example, that in Argentina there was good management of the free market in the stage of former president Mauricio Macri, but with the return of Peronism, they went back on what they had walked and returned to policies in which they do not care about the health of the people. public finances, it returns to debt, there is no independence from the Central Bank, but rather it is loot.

In the case of El Salvador, he considers that this increased risk is given by Bukele’s populist tinge.

Additionally, he comments that Ecuador produces a very particular phenomenon. If only the macroeconomic figures of the moment, then the country could have investment grade. This is a status that countries that achieve a debt rating of BBB- and above have. Instead, countries that do not reach that rating have junk bonds. Ecuador, having a rating of B-, is in this second category (junk bonds). so though Ecuador has a manageable debt service, low inflation, non-financial public sector surplus, reserves of more than $9 billion, and these are positive indicators, unfortunately for having a record of defaults and a history of political instability, then it gets lower ratings. “That’s why we are where we are,” he adds. (YO)