A report by the investment bank Barclays believes that the challenge for Ecuador at the moment is “distrust in the country generated by the perception of political risks and its willingness to pay, which limits access to financing”. In this sense, he talks about the need for the new president Daniel Noboa Azín to inject a juice trust, showing a clear willingness to pay the debt. But, apart from that, he believes that he could still have opportunities for a new debt renegotiation.

Namely, after the meetings that the elected president held with investors in the USA, and even with the investment bank Barclays itself, the country’s risk increased. Noboa announced in Washington that Ecuador risks the creation default of public debt in 2026 or 2027 if the state does not increase public revenues. He also had insufficiently precise statements about possible tax reform, which would rather go for tax cuts.

Last week, country risk approached 2000 points. On Thursday, November 9, it rose to 1,993, and although it fell to 1,947 the next day, this Monday, November 13, it rose again to 1,977 points. This indicator is a thermometer that the markets have regarding the ability to repay debts, but also the ability of the state to access financing. The higher the level, the less confidence in the payment and the less access.

According to the analysis of Barclays, in these conditions it can be seen that “the country is exposed to the risk of repeating the cycle of debt default and restructuring”. However, it indicates that Ecuador may still have a chance to break this cycle.

And therefore there would be the possibility of accessing liquidity, which could allow it to carry out debt buybacks that provide some cash and some savings, an improvement in the debt profile that would lead to a significant reduction in the risk of default in the short and medium term, and could facilitate access to other sources of financing . Instead, if you don’t act quickly, waiting until 2025 could be too late to change market perceptions and risk being trapped in a default/restructuring cycle, the analysis argues.

Country risk: how has it evolved over the last 10 years?

For Barclays, the Government should give a strong signal of willingness to pay. However, he also acknowledges that President-elect Daniel Noboa is inheriting a complex fiscal situation amid difficult governance. “A series of political upheavals in recent months has led to the retreat of the country on the path of fiscal consolidation achieved until last year. In addition, there are social demands to create jobs and resolve the security crisis, which could have significant fiscal costs.”

He comments that the country is also exposed to the effects of El Niño and will have to face the closure of the ITT oil field, which puts more than 10% of oil production at risk. These are big obstacles for the new administration.

Barclays also points to the fact that the new administration was elected as a transitional government for only 18 months, making its re-election in 2025 a top priority. In this scenario, he indicates that “given the centrist approach of the Nobo government, his re-election could be positive news for the markets, especially given that the alternative could be a less market-friendly government.” However, he adds, a delay in any kind of adjustment measure leaves the market without a clear positive catalyst in the short term.

An alternative scenario in which the Government moves forward with adaptation may also not yield better results. Even if Ecuador were to present a highly qualified economic team and announce a series of orthodox measures to reduce its fiscal imbalance, such as cutting fuel subsidies and raising taxes, this may not be enough to radically change the market.

For Barclays, the centrist composition of the Assembly could facilitate an alliance with the centrist party Construye and the PSC. However, it also highlights Correismo’s interest in a quid pro quo administration (giving something in exchange for something else) for some sort of legal amnesty could allow the administration to reach a “political truce,” which could give it some political room for maneuver.

Use of reserves

Barclays also talks about international reserves and how Noboa’s government could take them at this time. The reserves amount to 6,000 million dollars, and the direct debiting of the reserves of the Central Bank to the Government would require the annulment of the laws that were implemented to preserve the stability of the dollarization system.

However, “there could be an indirect way to access reserves and further mitigate the damage, by allowing local banks to use their required reserves to buy local debt, which could potentially provide enough liquidity for the Government to buy back the debt and cover some of its financing needs. “

Using reserves to exclusively finance current costs would be negative news and leave the country in a more vulnerable position. However, if the government uses at least $1 billion to buy back its shortest-dated bond (ECUA 2030), which is currently priced at less than half its face value, it could remove almost the entire issue from the market and drastically reduce the risk of default in the next seven years, the analysis shows.