Until last May, Ecuador was the nation in the region with the lowest increase in country risk. Ecuador had increased this indicator by only 13% between May 24, 2021 and May 24, 2022. In this period it ranged between 800 and 900 points.
However, since last June 13, the day the Confederation of Indigenous Nationalities of Ecuador (Conaie) called for an indefinite strike, the country’s risk has not stopped increasing. That week Ecuador closed with a country risk of 1,014 points. And since June 21, when the protests became radical, the score reached 1,057 when countries like Peru registered 178 points, according to data from the Ámbito de Argentina portal, which monitors this indicator in the region.
Ecuador’s country risk exceeds 1,000 points due to the protests
With the position of closing the dialogue by the leaders of the Conaie, it is expected that this indicator will continue to rise. In addition, if the government yields and gives way to the entire list of demands of the indigenous movement, it will be very difficult for the country’s risk to decrease, analysts consulted indicate.
But what is country risk and why is it important for a nation’s economy?
Country risk is an indicator that measures the probability that a country defaults on its financial obligations, based on elements that encompass more than just economic analysis, but also political stability. Issues such as foreign investment or access to international financing largely depend on this indicator.
For Alberto Acosta Burneo, editor of Analysis Weekly, the high country risk that Ecuador currently registers demonstrates the concern that investors have regarding unemployment and the political crisis that exists.
“And why should we care? Because it determines the cost of financing. A developing country like Ecuador has a shortage of financing,” she says.
For the expert, the rise in this indicator not only impacts the debt to be acquired, but also the current one: “There is debt with variable rates and more interest will have to be paid on that debt. I estimate that the increase in country risk these days is going to raise interest payments above $200 million. In addition, the financing of new debt will become more expensive.
The country’s current need for financing is approximately $7,000 million, although it was reduced thanks to current oil prices, since before it was around $9,000 million. However, there is still a gap to fill and without a positive country risk, it will be difficult to find financing or the one that is acquired will be expensive.
Country risk Ecuador, the one with the lowest increase this year in the region
“This makes the country unattractive for investment, since it shows that there is no stability. A high country risk delays entry into an international bond market that helps financing or financing will be accessed at rates of 12% or 14%, which are very high,” says economist Jorge Calderón.
He considers that the country risk was already on the rise due to the lack of political agreements in the Assembly that prevented the approval of laws, but that the protests have triggered it.
Why does a strike impact the country risk of a nation?
When social demonstrations are peaceful, this indicator does not usually have major changes. However, when the protests are violent, there is a negative international perception and the country risk skyrockets.
“The current protest in Ecuador is not just any protest. It has already been revealed that there are interests, including the destabilization of democracy, of certain political groups that have tried to fish in troubled rivers and, if possible, overthrow the government of Guillermo Lasso. So, a protest that is destabilizing the democratic system is something that worries (investors) a lot,” says Acosta Burneo.
The belligerent attitude of some actors in the indigenous movement has also put Ecuador’s production at risk and this makes investors rethink. “They see that if they start a company, in the future they can invade it, paralyze it. So, the country risk increases because negative perceptions are generated”, adds Calderón.
Strike leaves losses of $100 million to producers and exporters, who on the coast are already beginning to feel the impact of road closures and ‘vandalism’
Conaie’s list of demands would also have a negative impact on country risk if approved
If the Government gives way to the list of ten petitions required by Conaie to lift the national strike, the country risk would surely skyrocket, since investors would understand that Ecuador would not have the resources to honor its debts.
“If we want to have less country risk, we must have less public spending and public spending must be established by income, by reality and not by ideology. The Conaie list is the recipe to continue in underdevelopment because they ask for more gasoline subsidies, which translates into fewer resources for important things like health, education. The Conaie statement is a request to Santa Claus, since they ask for all things at the same time”, indicates Acosta Burneo.
Calderón affirms that if the Government agrees to Conaie’s demands, income could be compromised and public spending would go out of control.
“If the price of fuel falls, more public spending will be generated and if other sources of income are not found, other than oil, that would mean that the country risk will not go down in the future. In addition, the fiscal deficit, without a doubt, would shoot up to 4% or 5% as it has happened in recent years”, he affirms.
The current oil boom is one of the bases for the indigenous leaders to affirm that the State does have the resources to approve the list of demands, but Calderón points out that this must be viewed from two angles.
“Yes, there are more oil resources, but it is also spent importing gasoline. Between what is sold and what is bought, the margin is very narrow. So, it’s not as easy as it seems,” he explains.
Other organizations that support the stoppages have affirmed that the requests can be fulfilled by bringing resources from the international reserve. However, Acosta Burneo assures that these funds are not from the Government, but belong to banks, cooperatives, social security and decentralized autonomous governments.
“In the government of Rafael Correa they told us that taking money from the international reserve was good, correct, but it is not like that. Luckily, this was reversed with the Law for the Protection of Dollarization”, indicates Acosta Burneo. (YO)