‘National debts are a manifestation of disorder’ in 2023

Editor’s note: Dear reader, this information is part of our premium content prepared at the end of 2023. In its content, you will find significant events of this year, and that is why we have left your access open.

The year 2023 ends with lower-than-expected growth, a huge fiscal deficit and a backlog that will continue to weigh on the future. This year of change of government, due to death on the cross, shows that in 2023, it bowed to social pressures and omitted adjustments. Mauricio Pozo was the Minister of Economy in the middle of the pandemic, and he analyzes it like this: The country has to make politically difficult decisions in order to start overcoming the problem of the declining economy, but it is not known whether the Government will be ready to do it for a year and a half.

What factors, in your opinion, marked this year on the economic front?

Let’s look at the roughest indicators: the country will not grow this year. The GDP would grow close to 1%, but the population grows faster: 1.4%, so in reality the result is negative. At this rate of growth, employment cannot recover. If we compare with the indicators before the pandemic, the economy has not improved, we are worse. Before the pandemic we were managing a deficit of 5 billion dollars, when President Lenín Moreno announced his plan, the fiscal issue began to be corrected. But now we’re ending the year the same way we did in 2018 and 2019. Additionally, we have less access to funding, the reserves that were at $9 billion are down to $5 billion. On all the issues I mention there is a deterioration. This is not a good result.

The country’s economy was monitored by the International Monetary Fund (IMF) all the time, but in the end there is no good result, what went wrong?

Your opinion is valid and important. Due to the problem of the pandemic, the country is entering a severe crisis, it was already complicated, without reserves, without fiscal space, with over-indebtedness, without international support. Mitigating the crisis caused by the pandemic would have been very difficult without the agreement with the IMF that was signed in June 2020. This enabled us to receive funds, I joined in the last days of October and as a result of that agreement 4000 million kuna, in addition to the funds provided by the multilateral . So, we invested 6.5 billion dollars in the economy in one quarter. If that money had not arrived, the problem would have been even greater. When the Government changed, during Las’ administration, the program was completed, in his first administration. So I think the program helped. But in the second moment there was no persistence and the government started to be careless. Thus, the Government of Las removed from the portfolio the reduction of fuel subsidies, and also “without a word or reason” it removed the achieved tax reform. Everything started to mix, to the extent that in 2023, tax revenues will drop by 8%, and consumption by 9%, and that’s why we have a deficit of more than 5 billion dollars. The program with the IMF helped us, but then the hand opened. This, of course, takes away the strength of multilateral programs and reduces their credibility.

But the government opened its hand especially because of the stormy social protest. Was there another alternative?

If this decision was good and if it improved the situation, it would also help to avoid political pressure. But far from that, despite these measures, he was doing badly politically, otherwise everything would not have led to the death of the crusader. Managing the economy in order is not incompatible with the political issue.

Indicators of resilience in an economy that is not growing as expected

Now, in the government of Daniel Noboa, one of the most characteristic features was the increase in country risk. What happened?

Markets clearly read the questions. They saw a lack of political sustainability in Laso’s government, it had no support in the Parliament, it had no support from the people, public spending began to overflow. They are worried that everything has become unsettled, even worse when a successful deal was reached with the IMF. Delays are a manifestation of this disorder. Meanwhile, President Daniel Noboa wins the election and is in power. I’m not taking credit away from him, but he’s managing and starting to put together a team and up to this point, where he’s been sitting for a month, he doesn’t have any economic plan. The tax law was not so important, it would be better to regulate the labor law. However, there is no economic program. This plan is something comprehensive in which the objectives of the monetary sector, the external sector, which has instruments, has responsible people and dates. Even more so if he has been in the government for a year and five months. That’s what the markets are reading. Multilaterals want to help, but they want to see the program. I think President Nobo is intelligent, with good intentions, but he thinks a lot about 2025. If he’s thinking about what concerns him or what doesn’t concern him, we’re in trouble.

How can the Government be financed at this moment?

The way to finance yourself is to stay out of debt. This is not the best, as it opens a hole to cover another. Funding is likely to emerge in the coming weeks, perhaps an advance sale can be sought, part of the gold sale would be delivered to the budget (about $300 million). However, it is not much and unfortunately the signal that is given is what worries me the most. That’s using reserves and it doesn’t smell good. There was a $900 million credit line for the El Niño phenomenon, they could use that for pending payments. Another option would be to reduce the subsidies, let’s see if they do something about it. They throw the problem forward, but it’s piling the ball, it’s a snowball.

Insecurity, power outages and legal instability, the ‘top 3’ impacts on companies that made 2023 difficult for production

As for energy, we end the year with interruptions, even though they are interrupted for a few days… The question of oil, how is it evaluated?

Well, it rained a lot. This might help, but other than that, I’ll give you three pointers that show what happened. Some time ago, Petroecuador merged with Petroamazonas, and both companies had 10,000 employees. The scheme was designed for optimization, but the court decision left it at zero. Now the oil company still has 10,000 employees, which affects competitiveness. The oil issue requires resources, and if there are none, foreign investments must be made. Production of 520,000 barrels is planned for this year, but it will close at 470,000 barrels. There may be obligations to pay arbitrations that render judgments against Ecuador. Regarding the problem of power failure, the obvious thing is that there was very poor management in the sector, we did not foresee the problem, no preparations were made. At the beginning of 2023, the Government of Las said that there would be no shutdown, but in the end we were not ready for that.

But there were higher expenses and lower income…

Consumption did not decrease at all, but increased. The government will reply that this is because the Court told it to increase that cost. It is true, but the ministry’s job is to adjust, if on the one hand expenditures are increasing, on the other hand it must be adjusted. That’s what it’s for, it’s the sad and bitter job of the finance minister.

How would you define this year in one sentence?

A year of worsening macroeconomic stability without growth. Do not misunderstand that there is no way out. Yes, there is a way to recover, but the solutions are politically difficult: subsidies, limiting public spending, reducing the state, but not just firing people, labor reform, this will help employment. You are looking for an improvement in social security, which represents a high fiscal cost. Debt renegotiation with holders and multilaterals would also be important. If you do this in 17 months, you will put the state train on the tracks.