By Richard Francis
& Robert Rowan
NEW YORK -- The impeachment of Ecuador's vice president and a referendum on political reforms set for Feb. 4 has delayed the introduction of a crucial economic reform agenda by the new president, says Fitch Ratings.
Impeachment proceedings began late in December 2017 against Ecuador's former Vice President Jorge Glas for allegations of bribe-taking related to projects related to Odebrecht. Glas was sentenced to six years in prison. The case is likely to be appealed. In early January, Glas was formally removed from his post and a new vice president was named.
Additionally, President Moreno announced a referendum for Feb. 4. The referendum largely seeks to reduce the influence of former President Correa by re-imposing presidential term limits that would bar Correa from running and dismissing members of a council who choose important posts. Passage would help Moreno consolidate power over the governing party and boost his political capital. The referendum would bar officials convicted of corruption from public office, eliminate a steep capital gains tax on property, restrict mining in sensitive areas and reduce the available area for oil exploration.
The economic policy framework will depend on the referendum's outcome as will Moreno's political standing and the government's ability to obtain external financing to meet the estimated financing needs of nearly USD9.0 billion in 2018. The government struggled to meet USD13.1 billion in financing requirements in 2017. A slowing economy, a large fiscal deficit, a rising debt burden and a fall in international reserves are key rating factors.
The government has made conflicting economic policy statements. Moreno cited the need for a fiscal adjustment, while also prioritizing increased social spending on low income housing and a solidarity bond. The government also made overtures to the private sector, but did not detail key policies to promote private sector investment, including revisions to tax and labor policies.
Ecuador experienced a modest economic recovery in 2017 with growth rising to approximately 1.5%, up from a forecast 0.7% in September 2017. Consumption was bolstered by high levels of government spending and bank lending expansion driven by strong deposit growth. However, the economy is likely to slow as the government cuts capital spending and bank lending declines due to lower bank deposit growth. The private sector remains in a wait and see mode, awaiting economic policy announcements by the government. This will likely negatively affect investment decisions, at least over the near term.
The economic recovery and end to import controls drove an increase in imports that led to deterioration in the current account balance. The current account deficit was approximately 0.5% of GDP in 2017, widening from a surplus of 1.4% of GDP in 2016 and resulted in a fall in international reserves by more than USD1.8 billion. The pace of outflows accelerated in December 2017, partially reflecting seasonal wage bonuses and higher imports on holiday consumption.
Larger fiscal adjustments are delayed as the political process is consuming policymakers' attention. This will widen the debt burden and the government will remain heavily reliant on external financing to cover financing needs. A modest fiscal deficit adjustment to 5.0% of GDP is likely in 2018, largely on further cuts in capex, but risks are to the downside. We estimate the deficit reached a still large 5.9% of GDP in 2017, down from 7.4% of GDP in 2016, due to some recovery in revenues linked to the economic recovery, an uptick in oil prices and some cuts to capex as large public infrastructure projects are finalized.
Fitch expects Moreno's political standing and economic policy agenda to become clearer after the Feb. 4, 2018 referendum.