The World Health Organization has warned that the COVID-19 coronavirus could lead to a worldwide pandemic.
The number of cases of coronavirus has increased exponentially, and according to Harvard University epidemiologist Marc Lipsitch, it could spread to between 40% and 70% of humanity by the end of the year. The incubation period lasts up to 14 days, and many asymptomatic people spread their disease before it is detected.
Despite the quarantine of millions of citizens in China, the epidemic has spread to South Korea, Japan, Iran, Italy, the United States and dozens of other countries (the first cases in South America have already been detected, including 6 in Ecuador by March 2).
If the mortality rate remains as high as in the first cases (1% - 3%), and a pandemic is unleashed, it could reach a death toll not seen since the 1918 "Spanish flu" pandemic (by comparison, annual seasonal influenza has a mortality rate of 0.1%, mainly affecting infants and the elderly with other health problems).
The Chinese economy, which has grown at rates above 6% annually since 1990, is collapsing, and forecasts of the global GDP growth rate have already been lowered; a recession could break out. Foreign trade, international travel and tourism are particularly affected sectors. Stock exchanges fell by 14% at the end of February.
A direct impact of the slowdown in the Chinese economy has been the fall in the price of oil and other commodities (palm oil, corn, soybeans, copper, etc.). The price of WTI crude oil has fallen 23% since the beginning of January, and has fallen below $ 50 per barrel (and below the estimated price for the 2020 Ecuadorian budget, of $ 51.30 per barrel).
The fall in oil has, in turn, influenced the steep increase of the so-called “country risk premium” (the investors' perception of Ecuador's ability to pay the external debt). This is the differential in the yield of Ecuadorian bonds in the secondary market with respect to the rate of the 10 year U.S. Treasury bonds. This index, which reached a level of 5069 basis points (50.69%) in December 2008 (when Correa declared a unilateral moratorium unilaterally not due to an inability to pay), had dropped to 446 in February 2018. After the indigenous strike, it increased to 1418, in January it went back to around 800, and at the end of February it shot up again to 1450.
It did not help that the Moody's rating agency has lowered its credit rating of Ecuador’s external debt to Caa1, considered “a poor position with a very high risk”. In its analysis of the fiscal and economic situation of the country, one of the negative factors mentioned was the inability to generate a social and parliamentary consensus on the economic measures required to deal with the fiscal downturn. Several political sectors are privileging their electoral expectations over the urgent need to recover the fiscal balance.
It should be remembered that the Correa Government did not make an economic adjustment when the price of oil began to fall in 2014, opting for aggressive indebtedness, which left a legacy of public debt of $ 60 billion (including external and internal debt, as well as other obligations). The public debt reached USD 58,560 million in January 2020, equivalent to 53.4% of GDP. Apart from that, according to the Ministry of Economy, there are “Other Obligations of the State”, which total USD 5,941 million.
The Government has cut public investment, aggravating the country's economic stagnation. But it has failed to significantly reduce current spending, which portends a fiscal deficit of 3.1% of GDP. At least USD 6665 million in financing will be required in 2020, including USD 2000 million expected from concessions and sale of public assets.
With the expected disbursements of the IMF and multilateral banks, and other non-orthodox measures (issuance of Treasury Certificates, arrears of payments) the 2020 financing gap is expected to be closed; but Moody’s and other economic agents are concerned that external debt amortizations will increase significantly from 2022, and the economic reforms necessary to achieve an economic recovery are not being adopted; The possible return of economic populism is also worrying.
(*) Translated and updated (to March 2, 2020) version of my column in Diario "El Universo" of Ecuador
https://www.eluniverso.com/opinion/2020/03/02/nota/7762857/coronavirus-petroleo-riesgo-pais
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