There is still uncertainty about the future of structural reforms and the country’s governance
Yesterday Guillermo Lasso’s government has passed six months and the macroeconomic figures are favorable to him, although there is still uncertainty about the political scenario and the destination of the structural reforms (among them, the tax one that was being discussed in the Assembly).
The investment banking Barclays issued a report in which it highlights that Ecuador it is registering a strong fiscal consolidation, helped by the economic recovery and the containment of expenses. He also mentions that the approval of the tax reform could accelerate this process.
For Barclays, Ecuador has the potential to exceed the fiscal consolidation objectives established in its IMF program, since fiscal data is already achieving better results than those required by the International Monetary Fund (IMF). Precisely in these days the government of Guillermo Lasso highlighted the robustness of its International reserves. Indeed, according to data from the Central Bank, reserves have grown significantly, especially if the annual figure is compared. While in November 2020 the reservations were at $ 5,066 million, by November 2021 they are already at $ 8,300 million.
According to the consultant, Stronger growth and higher-than-expected oil prices could lead to a fiscal deficit of around 1% of GDP, lower than expected in the IMF program in 2021-2022. Thus it says that this index could go from 5.5% of GDP in 2020 to 1.5% of GDP in 2021, and go to a surplus of around 1.0% of GDP in 2022. Additionally, an expected growth of GDP of about 4% should put government debt on a downward trajectory, says Barclays.
He also explains that the fuel price freeze could imply the need for some changes in the IMF program, but does not lead to greater financing needs.
However, Barclays also considers that if the Assembly were to reject the tax reform that seeks to raise $ 1.9 billion in two years, this could lead to the death of the cross (the president dissolves the Assembly) which would trigger new presidential and legislative elections. For Barclays, the approval of the tax reform is necessary to reduce the cost of financing when the government returns to the market and it would also generate less political risk.
Currently the country risk is still high. According to data from the Central Bank of Ecuador (BCE), this indicator has been oscillating in recent months between 749 points (September 1) and 815 (November 23).
In any case, for Barclays, the tax reforms remain focused on high-income companies and individuals, which should facilitate the approval of the package. The bill has already been approved by the Economic Development Commission with seven votes in favor and only one against, and so far it has not undergone major changes. Barclays believes that the government granted a freeze on domestic fuel prices, which was Pachakutik’s main demand. “The labor reform is another concession that the government could offer,” he says.
“In addition, the president has the power to dissolve the Assembly and call early elections (death cross), which could act as an incentive for the opposition to cooperate in the tax reform,” the analysis indicates.
Meanwhile, Jaime Carrera, from the Fiscal Policy Observatory (OPF), also makes a positive assessment of the government’s macroeconomic management. “There was a successful vaccination campaign that undoubtedly activated the economy, which has generated more income for the treasury,” he says.
Additionally, the prices of oil have favored him. Thus, a lower deficit and a better economic growth figure are expected at the end of the year. Both good news.
About the International reserves recognizes that these have grown significantly, both due to the improvement in exports, but also due to multilateral disbursements such as the IMF and FLAR. He warns that these reserves will fall especially in December, when the Government must make certain extra payments such as tenth salaries.
In any case, he explained that the Government should try to accumulate as much liquidity as possible for the first months of next year in which there will not be strong income.
For Carrera, the Government has acted correctly when carrying out the tax reform and having signed certain decrees that give a framework, at least theoretical, to the oil and mining sector. Labor reforms, investment reforms and, above all, governance are still pending, he said. (I)
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