There is a lack of credit and it is necessary to remove the rigidities that make it difficult for companies to obtain foreign loans. Let’s look at the situation.

Interest rates are rising on the domestic market for various reasons. First for inflation. Until 2021, inflation was negative, that is, savers profited even with money in their current account. However, inflation was fueled in the USA and Europe, which caused an increase in the prices of imported products and those that process foreign inputs. The result was that, if we did not have inflation, we were going for a price increase of 4.2%, which luckily has already slowed down to 2.8%. Inflation has led banks to raise the deposit rate and pass that increase on to the lending rate. Added to that, the bank has already lent out the money it saved excessively during the pandemic and now the demand for loans is growing more than deposits. The credit starts to decrease.

Interest rates for corporate and business loans have increased from 1 January 2023. Here are all the current rates

In order to change this dynamic, the bank raises the interest rate and in this way convinces Ecuadorians to save instead of spend, and also discourages some who are eager for loans. But he runs into a problem: the weakness of the government prevents the authorities from raising the maximum allowed rates. With the current caps, business loans – which have a very low legal maximum – are discouraged and consumer loans are favored.

Given the lack of internal credit, private companies seek credit abroad for local investment, and local banks also have access to credit lines from abroad. But since interest rates on foreign loans have risen so much, current regulations do not allow them to deduct the entire cost of the foreign loan from the tax base for income tax. This situation makes borrowing abroad inconvenient. Therefore, credits will continue to be limited.

Time deposits and bank loans rose more than 10% in Ecuador

Good use of credit

If one or the other is not done, the economy will remain constrained by a lack of credit.

The regulations in question were put in place to close the door on the avoidance mechanism. It used to happen that some people registered related person loans in tax havens at very high rates, which enabled them to evade income tax and take money out of the country. This was reduced in 2015 – a good measure by the Monetary Board chaired by Patricio Rivera during the correato. Finance costs can only be deducted up to a limit of 0.25 percentage points above the average corporate interest rate on the national market.

For the mechanism to work well, the corporate rate must be allowed to fluctuate in line with the market. But as we have already indicated, there is an artificially low legal maximum that limits it. This situation, in addition to making internal loans scarce for companies, also limits access to external loans. In order for the 2015 mechanism that closes the possibility of tax fraud to function well, it is necessary to adjust the maximum rates to the reality of the market.

It is appropriate to raise the maximum interest rates, which could be reduced again when the loan becomes cheaper. It turned out that the authorities are inclined to modify the formula that ties the upper limit of foreign credit to the corporate rate. It’s less fancy, but it would still work. If one or the other is not done, the economy will remain constrained by a lack of credit. (OR)