Economic groups in Ecuador strengthened under Correa

By Luis Fierro Carrión

Twitter: @Luis_Fierro_Eco

            The main economic groups in Ecuador strengthened during the decade of the government of Rafael Correa, according to information from the Internal Revenue Service (SRI).

            The income of the 27 main economic groups increased from 28.4% of Ecuador's gross value added in 2013, to 29.6% in 2017, as stated in my article “Strengthening of Economic Groups in Ecuador in the last decade”, published in Revista Economía of the Central University of Ecuador (No. 114, https://doi.org/10.29166/economia.v71i114.2222).

            This concentration of capital continued its course, despite the rhetoric of "21st century socialism", "citizen revolution" and "supremacy of work over capital" employed by the Correa government.

            Taking a longer time perspective, 22 economic groups for which continuous SRI information is available from 2007, doubled their income between 2007 and 2017, as their income went from $ 11,007 million in 2007 to $ 21,919 million in 2017.     

            Those economic groups that benefited from the economic policy adopted by the government expanded, which favored the expansion of domestic consumption, the increase in public spending, imports, the real wages of workers, the wage mass of public employees (both through hiring more employees and the increase in their average remuneration) and the construction of infrastructure.

While a Superintendency of Market Power Control was created, and legislation was passed leading to the separation of financial institutions from productive companies and the media, such policies did not stop the process of consolidation of the economic groups. The recession that began in 2014 had a concentrating effect, as some small and medium-sized enterprises went bankrupt and larger companies expanded their market share. It might be that with the deeper recession of 2020, as a result of the COVID-19 pandemic, the total sales volume of major economic groups may fall, but a concentration could once again occur, given that many small and medium-sized enterprises are failing.

      According to the SRI, the total collected by the State from these groups reached $3,092 million, equivalent on average to 10.8% of their revenue.   It should be noted that the term "income" for the SRI represents gross income (e.g. sales), and not net income or profits.

      Considering the total collected, the groups that contributed a higher percentage of their income to the State were: Banco Bolivariano (79.6%); Banco Internacional (63.5%); ProduBanco (56.8%); and Banco Guayaquil (41.4%).

      At the other end, among the 25 largest groups, the ones that contributed the least to the State were: Holding DINE (Directorate of Army Industries, 1.5 %); La Fabril (2.7 %); PRONACA (2.9 %); OCP Ecuador (which includes Andes Petroleum and Repsol,  3.5 %); and the Alvaro Noboa group (3.6 %).

      The 25 groups include: 1,236 national companies, 391 foreign companies, 17 financial institutions, 11 media companies and 172 natural persons, for a total of 1,809 members. Of the total members of the 25 groups, 124 members were domiciled in tax havens (as defined by the SRI) and 62 were offshore companies that appeared published in the "Panama Papers".

      The 25 groups owed back taxes for $333 million (at the end of 2017), of which the main debtors were the groups: Exportadora Bananera Noboa ($161 million); ARCA Ecuador ($46 million); Eljuri ($43 million); and Reybanpac ($29 million).

Several of the groups were among the main beneficiaries of the pardons of  interests, fines and surcharges for tax debts made in 2015 (Correa's government) and 2018 (Moreno’s government); the main ones were: OCP/Andes  ($787 million),  Banco Pichincha ($131 million), CONECEL/Claro ($100 million), Alvaro Noboa ($76 million)  and Eljuri  ($19 million) (according to studies by Wilma Andrade, Alberto Acosta and John Cajas cited in my article).

In some cases, the groups were involved in tax and judicial lawsuits, as well as seizures, diminishing their economic power. The most emblematic case is that of the Noboa Banana Export group (Alvaro Noboa), which faced several legal proceedings and seizures, so its revenue fell by -4.6% between 2007 and 2017. A more extreme situation is that of the Isaias group, whose main companies were seized (the SRI stopped reporting on this group in 2008).  In other cases, the groups went bankrupt: Tosi / Banco Territorial Group (SRI stopped reporting in 2013); Ortega Group (dropped to 238th place).

      Among the 22 groups analyzed for the period 2007-2017, the ones that grew the fastest were:

        a)     KFC (Anhalzer-Serrano), grew 360% over the period.

        b)     Cerveceria Nacional (DINADEC), growth of 316 %.

        c)      Herdoíza Crespo Construcciones (+291%) benefited together with other construction companies from the large public investment in this area.

        d)     Holding DINE (+232%), expanded into other areas (Hotel Marriott, real estate)

        e) PRONACA (219%) benefited from the expansion of domestic consumption, as well a

a)                       Going further back, in  my  book The Financial Groups in Ecuador  (Fierro, CEDEP, 1991), the antecedents in 1986 of the main economic groups  identified by the SRI for the period 2007-2017, were 20 groups that accounted for 16.1% of the assets, 20.7% of sales and 18.1% of the capital of all companies.

Faced with the failure of the government’s proposal for companies and persons with higher income to contribute to the COVID-19 health emergency, some analysts have suggested that a wealth tax be re-instituted, as was done after the Manabí and Esmeraldas earthquake in 2016.  That tax grossed only about $200 million, in part because many wealthy people do not report their net assets.

The portal "Periodismo de Investigacion" reported on the 200 largest net assets declared. 5,196 people reported a wealth of more than $1 million, with a total equity of $16 billion. However, the article mentions that an estimated 280 Ecuadorians have taken out $30 billion abroad.

Among the 200 largest net wealth holders in Ecuador are some of the main shareholders of economic groups, such as Isabel Noboa, Luis Bakker (PRONACA), Marcelo Herdoiza (Herdoiza Crespo Construcciones) and the Hidalgo Barahona family (Hidalgo & Hidalgo). Of note, the list does not include some entrepreneurs who have benefited from contracts with the State, such as Enrique Cadena, Conto Patiño Martínez, Diego Sánchez (Seguros Sucre), Tomislav Topic, or the Eljuri family.

(*) An abbreviated version of this article was published in Spanish by “Diario El Universo” on June 5, 2020.

https://www.eluniverso.com/opinion/2020/06/05/nota/7861404/fortalecidos-grupos-economicos

The author is an economist graduated from the Catholic University of Ecuador (PUCE), with graduate degrees from the University of Oregon and the University of Texas at Austin. He was a staff member of the IDB from 1997 to 2013, and Representative of Ecuador to the IMF in 2006. Advisor on climate finance and development issues. These are his personal opinions.

Los principales grupos económicos en Ecuador se fortalecieron durante gobierno de Correa

Fortalecidos grupos económicos | Columnistas | @eluniversocom

Los principales grupos económicos en el #Ecuador se fortalecieron durante la década del gobierno de Rafael Correa, según datos del @SRIoficialEc

Los ingresos de los 27 principales grupos económicos aumentaron del 28,4 % del valor agregado bruto en 2013 a 29,6 % en 2017, según mi artículo ‘Fortalecimiento de los grupos económicos en el #Ecuador en la última década’, Revista “Economía”, No. 114

http://revistadigital.uce.edu.ec/index.php/ECONOMIA/article/view/2222

Los 22 grupos económicos para los cuales hay información del SRI a partir del 2007 duplicaron sus ingresos entre 2007 y 2017, con ingresos de $11.007 millones en 2007 y $21.919 millones en 2017. Se fortalecieron los grupos económicos que se beneficiaron de la política económica del gobierno.

El portal @Pinvestigacion3 reportó sobre los mayores patrimonios declarados. 5.196 personas reportaron un patrimonio superior a un millón, con un total de $16.000 millones. Se estima que 280 ecuatorianos sacaron al exterior $30.000 millones.

Entre los 200 mayores patrimonios constan accionistas de los grupos económicos, tales como Isabel Noboa, L. Bakker, Marcelo Herdoíza y familia Hidalgo. No constan varios beneficiarios de contratos con el Estado, como Enrique Cadena, Conto Patiño, Diego Sánchez, Tomislav Topic o la familia Eljuri.

https://twitter.com/luis_fierro_eco/status/1268872551830355976?s=21

Una apuesta arriesgada y fallida sacrificó la liquidez del Ecuador

Por Luis Fierro Carrión (*)

En 2018, el Gobierno efectuó dos apuestas arriesgadas, una fue el crédito con Goldman Sachs International por $ 500 millones y la otra con Credit Suisse. Los resultados no fueron los mejores.

La justificación para las operaciones de 2018 era conseguir una tasa de interés anual de 6,5%, más baja de la que prevalecía en el mercado financiero en ese momento para el Ecuador, cercana al 10%. Sin embargo, no está claro cuánto se terminó pagando en intereses, comisiones y penalidades por las “llamadas de margen” y el pago anticipado de las operaciones. Es probable que haya sido más que 6% anual en los menos de dos años que estuvieron vigentes.

El problema de fondo es la escasa transparencia que persiste en el Ministerio de Economía y Finanzas con respecto a la deuda externa y a estas otras operaciones financieras, lo cual es herencia del gobierno de Correa, pero se ha mantenido en el actual.

“El fracaso en alcanzar un acuerdo consistente con la sostenibilidad de la deuda con los acreedores hasta mediados de agosto (cuando expira la suspensión del servicio de la deuda con los acreedores externos del sector privado)”, así como la falta de una adecuada contribución por parte de los acreedores bilaterales dejarían al país en condiciones muy vulnerables por un largo período, dice el FMI

(*) Mas en la Revista Gestión: 

https://revistagestion.ec/index.php/economia-y-finanzas-analisis/una-apuesta-arriesgada-y-fallida-sacrifico-la-liquidez-nacional

Fuente: FMI

Ya en 

A risky and unsuccessful bet that sacrificed Ecuador's liquidity

By Luis Fierro Carrión (*)

In August 2018, the government of Ecuador carried out a credit operation with Goldman Sachs International, for $ 500 million dollars; the operation was guaranteed with bonds with a nominal value of $ 1,201 million dollars.

In October, Minister Martínez made another "repurchase agreement" or "repo" for the same amount, with Credit Suisse, likewise with a guarantee of bonds with a nominal value of about $ 1.2 billion.

María de la Paz Vela published back in August 2018 in Revista Gestion an article titled "High risk in the new financing of Ecuador with Goldman Sachs for $ 500 million" (https://bit.ly/3coGHte), in which she highlighted that “It is an extremely high risk for the country in the present and future situation of scarcity of resources, with the high level of indebtedness it faces - of 60% of GDP or more - extending a collateral of 2.4 times the value of the credit, having high maturities of capital expected for bonds contracted in previous years.”

A collateral of 2.4 times the amount loaned was undoubtedly exaggerated, and very risky.

But even so, back then it could not be foreseen that the value of the bonds in the secondary market could drop below 40% of the nominal value, which would trigger a “margin call” to maintain the real value of the guarantees.

But that was exactly what happened after the October 2019 Indigenous Uprising, when the 2022, 2023 and 2026 bonds fell below 40%, and later, as a result of the COVID-19 pandemic and the collapse of the oil price in the international market, they would drop to less than 30% of the nominal value.

This led to the government having to pay a total of $ 762.9 million to compensate for the drop in collateral value between November and March, with the bulk of $ 506 million paid in March, in the midst of the pandemic. Additionally, $ 220 million had been amortized (it is not clear when); therefore, to close the two “repo” operations in April 2020, the government indicated that it had to pay an additional $ 35.9 million.

In the Ministry's bulletin, an amortization of debt with banks for $ 865 million appears in April, plus $71.2 million paid in "interest and commissions". According to the Ministry's explanation, only $35.9 million was paid in cash, and the rest corresponded to previous payments for “margin calls” of $762.9 million. It is unclear whether other bank debts were amortized in the month.

The justification for the 2018 operations was to achieve an annual interest rate of 6.5%, lower than that prevailing in the financial market at the time for Ecuador, close to 10%. However, it is not clear how much the country ended up paying in interest, commissions, and penalties for the “margin calls” and the advance payment of the operations. It is likely that it resulted in more than 6% per year in the less than two years that they were in force.

The underlying problem is the lack of transparency that persists in the Ministry of Economy and Finance regarding foreign debt and these other financial operations, which is a legacy of the Correa government, but has continued in the current government. The payment of the two operations was first reported by the "Dollarization Observatory" and then picked up by "Bloomberg", before the Ministry reported what had happened.

A potential risk is that the payment of the total capital of these two operations could have an adverse effect on the renegotiation of the outstanding bonds (by inferring unequal treatment of different private creditors).

In April, the consent of the bondholders was requested and obtained, to suspend the payment of interest for four months, in order to renegotiate in that period the terms of the bonds: amount (possible reduction of part of the principal), interest rate, term, grace period etc. A grace period would be sought (without paying principal or interest); possibly an extension of the term (especially those that expire in 2022, 2023 and 2026); and if possible a reduction in interest rates (which average nearly 9 % per year). The renegotiation of Argentina's debt with private creditors could be taken as the basis, although an agreement has not yet been reached.

In a conference on May 29, Minister Martinez mentioned that another financial transaction with Goldman Sachs for $ 500 million is also planned to be canceled in September; this operation was guaranteed with gold from the reserve (according to the "Dollarization Observatory" the amount would be $ 515 million).

The truth is that the government carried out two very risky operations, with the aggravating circumstance that they had to advance the payment precisely in the most precarious moments due to the pandemic and quarantine; unlike other contingent bonds based, for example, on GDP growth or on natural disasters, this one was designed to be paid just in the moment when Ecuador's country risk skyrocketed.

Relationship with the IMF: emergency loan and suspension of the EFF

On May 28, documents related to the approval of the "Rapid Financing Instrument" for $ 643 million by the International Monetary Fund (IMF) were published. The curious thing is that the approval of this emergency loan occurred on May 2, but the documents were only released on May 28.

This was perhaps because the report mentioned, precisely, the payment of the "margin calls" for the two "repo" operations with Goldman Sachs and Credit Suisse, and the government preferred not to disclose it at that time. It is noted that the international reserve fell by about $ 1.5 billion until the end of March, "the decline was driven by the payment of margin calls on transactions with some private banks ... and public sector external debt service". Net international reserves ended at a negative amount of - $ 3.1 billion at the end of March.

The report also projects a contraction of 6.7% in GDP in 2020, and a financing gap of 8.4% of GDP in 2020 and 7.6% in 2021. In 2019 there was growth of 0.1%, higher than the expected contraction of 0.5%. Total GDP is not expected to return to the 2019 GDP level until 2023.

The report also mentions a reduction of $ 1 billion (2.3% of the total) in deposits from the private financial system at the end of March. However, it indicates that the financial system is well capitalized and has adequate reserves for bad debt. While noting that systemic banks are relatively more resilient, smaller banks and credit unions are "comparatively weaker, especially in terms of asset quality and profitability, and exposed to the shock through a loan portfolio concentrated in consumers loans and microfinance”.

The IMF estimates an increase in the fiscal deficit by 6% of GDP, with a drop in oil revenues and tax revenues, as well as additional expenses for health, social protection and social security.

Public debt would increase to 69% of GDP in 2022 and would remain at that percentage until at least 2024 (a possible reduction in the amount as a result of the renegotiation is not taken into account).

The document also cancels the existing Extended Financing Facility (EFF) program, which was approved in March 2019, in anticipation of another long-term loan being negotiated (also, theoretically, before August, according to the terms of the consent request to bondholders to defer payment of interest).

Among the risks at the international level mentioned in the IMF report:

• Lower-than-projected oil prices.

• A more severe and/or protracted COVID-19 pandemic.

• Weaker-than-expected global growth, which would affect the demand for export products.

• Increased protectionism in international trade

• A reduction in international financial flows (which would not affect Ecuador as much, since in practice it does not have access to the private markets).

Regarding domestic risks, apart from the continuation or worsening of the pandemic, the following are mentioned:

• A shortfall in fiscal revenues

• Health expenses higher than expected.

• "social discontent that causes economic disruptions and policy missteps"

• “lack of political cohesion in pursuing much-needed structural reforms and policies to support the population in crisis and to restore macroeconomic stability”

• “intensification of financial sector vulnerabilities”.

The IMF adds that "failure to reach an agreement consistent with debt sustainability with creditors by mid-August (when the standstill on debt service to external private sector creditors expires)" as well as the lack of an adequate funding by bilateral creditors would leave the country in very vulnerable conditions for a long period of time "including through the forthcoming presidential election period".

A "substantial debt operation" is required to address large and persistent financing gaps in the medium term; but, the Fund adds, a substantial fiscal consolidation (of at least 6% of GDP) will also be required.

(*) This is an English translation of the article published by “Revista Gestión” on June 4, 2020.

https://revistagestion.ec/index.php/economia-y-finanzas-analisis/una-apuesta-arriesgada-y-fallida-sacrifico-la-liquidez-nacional

The author is an economist graduated from the Pontifical Catholic University of Ecuador (PUCE), with graduate degrees from the University of Oregon and the University of Texas at Austin. He was a staff member of the IDB from 1997 to 2013, and Representative of Ecuador to the IMF in 2006. Advisor on climate finance and development issues. These are his personal opinions.

Source: IMF