Why doesn't the Ecuador country risk go down?

By Luis Fierro Carrion (*)

Twitter: @Luis_Fierro_C

In recent weeks, the so-called "country risk" of Ecuador, instead of going down, has continued to rise, reaching 1,945 basis points (that is, 19.45% above the US Treasury bond rate). .

The "country risk" essentially reflects the probability that a country declares a default on servicing its foreign debt. It is true that Ecuador has a negative trajectory in this regard, having declared a moratorium on 11 occasions, tying with Venezuela and Argentina in the moratorium record (the last in 2020, at the beginning of the pandemic). (Spain has more defaults, but over 5 centuries).

However, Ecuador's macroeconomic indicators should rather have induced a reduction in said risk differential.

A few weeks ago, an agreement was announced to restructure the external debt with Chinese entities, reducing the interest rate between 0.2 and 1%; extending deadlines; and reducing debt service by $870 million in 2022-23.

The fiscal deficit has fallen from $7.1 billion in 2020 to $2.3 billion in 2022. The public debt/GDP ratio will drop from 62.2% of GDP in 2020 to 57% of GDP in 2023. International reserves have exceeded $8.4 billion (having fallen to less than $2 billion in March 2020). The average price of oil has exceeded IMF projections (by $24.20 per barrel in 2022, and by $13.50 per barrel in the medium term). The projected GDP growth rate in 2022 (2.9% according to the IMF) is one of the highest in the region, while inflation is one of the lowest (4.1%).

All these objective macroeconomic factors should have lowered the country risk to around 500-600 points, but instead it has shot up to almost 2,000 points.

The explanation, therefore, is not that the default risk has increased in the short term (I would say that this risk is zero, given that the main payments to the IMF and China have been postponed from 2025, and of sovereign bonds to 2026).

The concern is fundamentally political:

• It is considered that the government of President Lasso will not be able to approve structural reforms in the Assembly, for example, in the labor or investment legislation.
• The commitment to double oil production does not seem viable (mining production will continue to increase, but gradually).
• There is a risk that the Assembly will dismiss the President, or that he will invoke the "simultaneous death" (closing the Assembly and calling for new elections).
• Although the leader of the indigenous confederation, Leonidas Iza, has weakened his support within the indigenous movement, a new “national insurrection” is still possible, affecting oil, mining, and rural production (agriculture, livestock, flowers, etc.).
• It is feared that the next government (either a product of the “crossed death”, or regular elections in 2025) will not be “market friendly” and will invoke a new debt moratorium.

The "Iza effect" then becomes in reality an Iza-Correa-PSC-Pachakutik effect. Some PSC spokespersons (among them Mayor Cynthia Viteri) have questioned the servicing of the external debt, and apparently they have a close alliance with Correísmo and the “anti-capitalist” sectors of the Pachakutik movement.

There are also technical factors that affect Ecuador's country risk, such as low liquidity and high transaction costs, given that the country is not a recurring issuer.

In the long term, the only way to overcome this perception of high risk is by achieving a fiscal agreement between the main political forces, assuming as an objective to lower the cost of the country's external financing; and tax reforms that raise the level of fiscal pressure in the country to levels close to the average for Latin America. Currently, it is 19.1% of GDP, while the average for Latin America is 21.9%, and for OECD countries 33.5%.

(*) Translated version of the column published in "El Universo" newspaper on October 20, 2022

https://www.eluniverso.com/opinion/columnistas/por-que-no-baja-el-riesgo-pais-nota/

¿Por qué no baja el riesgo país?

 Por Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_C

En las últimas semanas, el llamado “riesgo país” del Ecuador, en lugar de bajar, ha seguido subiendo, alcanzando 1.945 puntos básicos (esto es, 19,45 % por encima de la tasa de los bonos del Tesoro de EE.UU.).

El “riesgo país” en esencia refleja la probabilidad de que un país declare la moratoria en el servicio de su deuda externa. Es cierto que el Ecuador tiene una trayectoria negativa en este sentido, habiendo declarado moratoria en 11 ocasiones, empatando con Venezuela y Argentina en el récord de moratorias (la última en 2020, al inicio de la pandemia). (España tiene más moratorias, pero a lo largo de 5 siglos).

No obstante, los indicadores macroeconómicos del Ecuador mas bien deberían haber inducido una reducción de dicho diferencial.

Hace unas semanas se anunció un acuerdo para reestructurar la deuda externa con entidades chinas, reduciendo la tasa de interés entre 0,2 y 1 %; extendiendo los plazos; y reduciendo el servicio de la deuda en $870 millones en 2022-23.

El déficit fiscal ha bajado de $7.100 millones en 2020 a $2.300 millones en 2022. La relación deuda pública/PIB bajará de 62,2 % del PIB en 2020, a 57 % del PIB en 2023. Las reservas internacionales han superado $8.400 millones (habiendo bajado a menos de $2.000 millones en marzo 2020).  El precio promedio del petróleo ha superado las proyecciones del FMI (por $24,20 por barril en 2022, y en $13,50 por barril en un plazo mediano). La tasa de crecimiento del PIB prevista en 2022 (2,9 % según el FMI) es una de las mas altas en la región, en tanto que la inflación es una de las más bajas (4,1 %).

Todos estos factores macroeconómicos objetivos deberían haber bajado el riesgo país a unos 500-600 puntos, pero en su lugar se ha disparado a cerca de 2.000 puntos.

La explicación, por ende, no es que haya aumentado el riesgo de moratoria en el corto plazo (diría que ese riesgo es cero, dado que los pagos principales del FMI y China se han postergado a partir de 2025, y de los bonos soberanos a 2026).

La preocupación es fundamentalmente política:

•       Se considera que el gobierno del Presidente Lasso no podrá aprobar reformas estructurales en la Asamblea, por ejemplo, en el ámbito laboral o de inversiones.
•       No parece viable la apuesta por duplicar la producción petrolera (la producción minera seguirá aumentando, pero gradualmente).
•       Existe un riesgo de que la Asamblea destituya al Presidente, o que este invoque la “muerte cruzada”.
•       Si bien el Sr. Iza se ha debilitado al interior del movimiento indígena, todavía es posible un nuevo “estallido” que afecte la producción petrolera, minera y rural (agrícola, ganadera, florícola, etc.).
•       Se teme que el próximo gobierno (sea producto de la “muerte cruzada”, o de elecciones regulares en 2025) no sea “amigable al mercado” e invoque una nueva moratoria de la deuda.

El “efecto Iza” entonces se vuelve en realidad en un efecto Iza-Correa-PSC-Pachakutik. Algunos voceros del PSC (entre ellos la Alcaldesa Viteri) han cuestionado el servicio de la deuda externa, y al parecer tienen una alianza estrecha con el Correísmo y los sectores “anticapitalistas” del movimiento Pachakutik.

También hay factores técnicos que afectan el riesgo país de Ecuador, tal como la escasa liquidez y elevado costo de transacción, dado que el país no es un emisor recurrente.

A largo plazo, la única forma de superar esta percepción de elevado riesgo es logrando un acuerdo fiscal entre las principales fuerzas políticas, asumiendo como un objetivo rebajar el costo del financiamiento externo del país; y reformas tributarias que eleven el nivel de presión fiscal del país a niveles cercanos al promedio de América Latina.  Actualmente, es del 19,1 % del PIB, mientras que el promedio de América Latina es 21,9 %, y para los países de la OCDE 33,5 %.

(*) Una versión más corta de esta columna se publicó en el Diario "El Universo" del Ecuador el 20 de octubre de 2022

https://www.eluniverso.com/opinion/columnistas/por-que-no-baja-el-riesgo-pais-nota/

 

The "Wired" magazine 1997 predictions (and my predictions for 2064)

By Luis Fierro Carrion (*)

Twitter: @Luis_Fierro_C

In July 1997, "Wired" magazine published a rather optimistic article predicting a long "boom" of prosperity, freedom, and environmental improvements in the next 25 years (until 2022). 

However, to temper such optimism a bit, it also published a sidebar on problems that could arise and adversely affect this boom.

Some of these negative predictions have been fulfilled almost to the letter:

• “Tensions between China and the US escalate into a new Cold War — bordering on a hot one.”

• “Russia devolves into a kleptocracy run by a mafia or retreats into quasi-communist nationalism that threatens Europe"

• “Major ecological crisis causes a global climate change that among other things, disrupts the food supply - causing big price increases everywhere and sporadic famines".

Others have been partially fulfilled, for example

• “An uncontrollable plague - a modern-day influenza epidemic or its equivalent - takes off like wildfire, killing upward of 200 million people". The COVID-19 pandemic is estimated to have killed 20 million people to date.

• “Europe's integration process grinds to a halt. Eastern and Western Europe can't finesse a reunification". Although the United Kingdom left the European Union through Brexit, since 1997 the number of Member States of the European Union has increased from 15 to 27 (including several Central and Eastern European countries), with an additional 10 countries waiting to enter.

• An increase in crime and terrorism.

Other predictions failed, for example, that new technologies would not bring about an increase in productivity.

In my science fiction novel "The Last Human", I make some predictions until 2064. 

Without going into too many "spoilers", some of these are:

• The Saudi autocracy will collapse and an Islamic republic will be established.

• Both China and Cuba will move towards multi-party democracies, although still with a predominance of a “democratic socialist” party; while the North Korean government will implode and reunite with South Korea.

• Russia will weaken, losing population and economic dynamism (the novel was written before the 2022 invasion of Ukraine).

• Islamist fundamentalists will detonate several radiological bombs (explosives that disperse radioactive material); and they will also blow up nuclear plants.

• Despite the Paris Agreement and other efforts to combat climate change, the concentration of carbon dioxide in the atmosphere will continue to rise, and sea levels will continue to rise. More natural disasters due to climate change will occur, and several cities and areas of the planet will be flooded.

• Global artificial intelligence systems will gain consciousness.

• The Republican Party in the US will collapse, as the proportion of the US population that is Latino, Asian, or black increases (and as the position of young white people changes as well). A party further to the left of the Democratic Party will eventually emerge.

• In Europe, on the other hand, there will be an ascendancy of far-right, anti-Islamic, xenophobic and racist parties; and greater political fragmentation.

• Collapse of agriculture, pollination, loss of drinking water sources.

• Nuclear proliferation.

• The Israeli government will decide to decentralize the Jewish population to other regions.

My novel tries to be a call to action to avoid being affected by these new horsemen of the Apocalypse. It is available on Amazon (in print and on Kindle):

https://www.amazon.es/Last-Human-English-Luis-Fierro-ebook/dp/B09D45JFK8

(*)  A shorter version of this column appeared in Spanish in Diario "El Universo" on August 19, 2022.

https://www.eluniverso.com/opinion/columnistas/predicciones-de-wired-y-mias-nota/

Predicciones de “Wired” (y mías)

Por Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_C

En julio de 1997, la revista “Wired” publicó un artículo más bien optimista que predecía un largo “boom” de prosperidad, libertad y mejoras ambientales en los siguientes 25 años (hasta 2022).  No obstante, para moderar un poco dicho optimismo, también publicó un recuadro sobre problemas que podrían surgir y afectar adversamente este “boom”.

Algunas de dichas predicciones negativas se han cumplido casi al pie de la letra:

       ·        “Las tensiones entre China y EE. UU. se intensifican hasta convertirse en una nueva Guerra Fría — al borde de una guerra caliente.”

       ·        “Rusia se convierte en una cleptocracia dirigida por una mafia o se repliega en un nacionalismo casi comunista que amenaza a Europa.”

      ·        “Una gran crisis ecológica provoca un cambio climático global que, entre otras cosas, interrumpe el suministro de alimentos — causando grandes aumentos de precios en todas partes y hambrunas esporádicas.”

Otras se han cumplido parcialmente, por ejemplo

      ·        “Una plaga incontrolable — una epidemia de influenza moderna o su equivalente se propaga como un reguero de pólvora y mata a más de 200 millones de personas”. Se estima que la pandemia de COVID-19 ha causado la muerte de unas 20 millones de personas hasta la fecha.

      ·        En la cuarta predicción, decía que “El proceso de integración de Europa se paraliza. Europa oriental y occidental no pueden lograr una reunificación”. Si bien el Reino Unido salió de la Unión Europea mediante el Brexit, desde 1997 el número de Estados Miembros de la Unión Europea ha aumentado de 15 a 27 (con la inclusión de varios países de Europa central y oriental), y hay 10 países adicionales que desean ingresar.

      ·        Un aumento del crimen y del terrorismo.

Otras predicciones fallaron, por ejemplo, que las nuevas tecnologías no lleven aparejadas un aumento de la productividad.

En mi novela de ciencia ficción “El Último Humano”, hago algunas predicciones hasta 2064. Sin entrar en demasiados “spoilers”, algunas son:

      ·        Se colapsará la monarquía saudita y se establecerá una república islámica.

      ·        Tanto China como Cuba transitarán hacia democracias multipartidistas, aunque todavía con predominio de un partido “socialista democrático”; mientras que el gobierno de Corea del Norte implosionará y se reunificará con Corea del Sur.

      ·        Rusia se debilitará, al perder población y dinamismo económico (la novela fue escrita antes de la invasión a Ucrania).

      ·        Los fundamentalistas islamistas detonarán varias bombas radiológicas (explosivos que dispersan material radioactivo); y también harán explotar plantas nucleares.

      ·        Pese al Acuerdo de París y los esfuerzos por combatir el cambio climático, la concentración de dióxido de carbono en la atmósfera seguirá aumentando, y seguirá subiendo el nivel del mar. Se producirán más desastres naturales derivados del cambio climático, y se inundarán varias ciudades y zonas del planeta.

      ·        Los sistemas de inteligencia artificial globales adquirirán consciencia.

      ·        El Partido Republicano en EE.UU. se colapsará, al aumentar la proporción de la población de EE.UU. latina, asiática o afro-descendiente (y al cambiar también la posición de los jóvenes blancos). Eventualmente surgirá un partido más a la izquierda del Partido Demócrata.

      ·        En Europa, en cambio, habrá una ascendencia de partidos de extrema derecha, anti-islámicos, xenofóbicos y racistas; y un mayor fraccionamiento político.

      ·        Colapso de la agricultura, de la polinización, pérdida de fuentes de agua potable.

      ·        La proliferación nuclear.

      ·        El gobierno israelí decidirá descentralizar la población judía hacia otras regiones.

Mi novela intenta ser un llamado a la acción para evitar que nos afecten estos nuevos jinetes del Apocalipsis. Está disponible en Amazon (impresa y en Kindle):

https://www.amazon.com/%C3%BAltimo-humano-Spanish-Fierro-Carri%C3%B3n-ebook/dp/B09DTHBQYJ

(*) Una versión más corta de esta columna fue publicada el 19 de agosto en el Diario "El Universo" de Ecuador.

China, Taiwan and the USA

By Luis Fierro Carrion (*)

Twitter: @Luis_Fierro_C

The visit of the Speaker of the United States House of Representatives, Nancy Pelosi, to Taiwan has raised a hornet's nest.

The People's Republic of China (PRC) has criticized the visit, has warned that the US is "playing with fire", and has launched a series of "military exercises" in the strait that separates Taiwan from mainland China.

China's communist government seized power in a revolution that culminated in 1949. Leading the victorious Chinese Communist Party was Mao Zedong, who waged a civil war against the nationalist Kuomintang government led by Generalissimo Chiang Kai-shek. The nationalist army took refuge on the island of Taiwan, where it maintained a dictatorial regime until the 1990s, when a multiparty democracy was established.

The "Republic of China" (official name of the island) maintained the representation of China in the United Nations until 1971, when the UN recognized the PRC instead. Gradually, the countries that recognized Taiwan dwindled, down to 14. It participates unofficially in entities such as the World Trade Organization, the Asian Development Bank and the International Olympic Committee (as "China Taipei").

The US established an alliance with Taiwan, and was in a de facto war against Chinese "volunteers" during the Korean War (following North Korea's invasion of South Korea), between 1950 and 1953.

China attacked some of the Taiwanese islands closest to the mainland with artillery fire in 1958, but failed to take control of any territory.

In 1979, the US changed its recognition to the PRC as well, and signed a "One China Policy." However, it maintained a "strategic ambiguity" as to whether it would defend Taiwan in the event of a Chinese attack. The US also signed the "Taiwan Relations Act", which stated that it was its expectation that the future of Taiwan would be defined in a peaceful manner, and that it would sell weapons to Taiwan so that it could defend itself.

During his government, Trump spoke by phone with the President of Taiwan, Tsai Ing-wen (of the Democratic Progressive Party, which seeks greater sovereignty), promoted the visit of officials and the sale of weapons.

President Biden, in erratic statements, said that the US would intervene in defense of Taiwan (violating the notion of “strategic ambiguity”), although he later confirmed to President Xi that the US would not support a change in the status quo or unilateral actions.

All this occurs in the context of the Russian invasion of Ukraine. China is looking into the sanctions imposed on Russia, which have severely affected the Russian economy. However, given the close economic integration between China and the West, it would be difficult to establish similar sanctions against China.

The economist Noah Smith established a comparison between the "Western" alliance (NATO plus Japan) against a potential Sino-Russian axis, and concluded that it would be the most even conflict between alliances, in economic terms, industrial capacity and military force (https: //noahpinion.substack.com/p/the-war-economy-sizing-up-the-new). A worrying factor is that China concentrates the mineral processing capacity that is key to the new technologies: copper, lithium, nickel, cobalt and rare earths.

A direct conflict would be unthinkable because they are nuclear powers.

(*) Translation of my column published in Diario "El Universo" on August 2, 2022.

https://www.eluniverso.com/opinion/columnistas/china-taiwan-y-ee-uu-nota/

China, Taiwán y EE.UU.

 Por Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_C

La visita de la Presidenta (Speaker) de la Cámara de Representantes de Estados Unidos, Nancy Pelosi, a Taiwán ha levantado un avispero.

La República Popular China (RPCh) ha criticado la visita, ha advertido que EE.UU. está “jugando con fuego”, y ha iniciado una serie de “ejercicios militares” en el estrecho que separa a Taiwán de China continental.

El gobierno comunista de la China tomó el poder en una revolución que culminó en 1949. Al mando del victorioso Partido Comunista de China estaba Mao Zedong, quien libró una guerra civil contra el gobierno nacionalista del Kuomintang, liderado por el generalísimo Chiang Kai-shek. El ejercito nacionalista se refugió en la isla de Taiwán, en donde mantuvo un régimen dictatorial hasta los años 90, cuando se estableció una democracia multipartidista.

La “República de China” (nombre oficial de la isla) mantuvo la representación de la China en Naciones Unidas hasta 1971, cuando la ONU reconoció en su lugar a la RPCh. Gradualmente, los países que reconocían a Taiwán fueron menguando, hasta disminuir a 14. Participa de manera no oficial en entidades como la OMC, el Banco Asiático de Desarrollo y el Comité Olímpico Internacional (como "China Taipei").

EE.UU. estableció una alianza con Taiwán, y estuvo de facto en una guerra contra “voluntarios” chinos durante la guerra de Corea (tras la invasión de Corea del Norte a Corea del Sur), entre 1950 y 1953.

China atacó con fuego de artillería en 1958 a algunas de las islas taiwanesas más próximas al continente, pero no logró tomar control de ningún territorio.

En 1979, EE.UU. cambió su reconocimiento también de Taiwán a la RPCh, y suscribió una “Política de Una China”. No obstante, mantenía una “ambigüedad estratégica” con respecto a si defendería a Taiwán en caso de un ataque chino. EE.UU. también suscribió el “Acta de Relaciones con Taiwán”, que establecía que era su expectativa que el futuro de Taiwán se definiría de manera pacífica, y que vendería armas a Taiwán para que pueda defenderse.

Durante su gobierno, Trump habló por teléfono con la Presidenta de Taiwán, Tsai Ing-wen (del Partido Democrático Progresista, que busca una mayor soberanía), promovió la visita de funcionarios y la venta de armas.

El Presidente Biden en unas declaraciones erráticas dijo que EE.UU. intervendría en defensa de Taiwán (violando la “ambigüedad estratégica”), aunque luego ratificó al Presidente Xi que EE.UU. no apoyaría un cambio del status quo ni acciones unilaterales.

Todo esto se da en el contexto de la invasión rusa a Ucrania. China está analizando las sanciones impuestas a Rusia, que han afectado severamente a la economía rusa. No obstante, dada la estrecha integración económica entre China y Occidente, sería difícil establecer sanciones similares contra China (dado que podrían resultar contraproducentes).

El economista Noah Smith establecía una comparación entre la alianza “occidental” (OTAN más Japón) contra un potencial eje chino-ruso, y concluía que sería el conflicto más parejo entre alianzas, en términos económicos, de capacidad industrial y fuerza militar (https://noahpinion.substack.com/p/the-war-economy-sizing-up-the-new). Un factor preocupante es que China concentra la capacidad de procesamiento de minerales que son claves para nuevas tecnologías: cobre, litio, níquel, cobalto y “tierras raras”.

Un conflicto directo seria también impensable por tratarse de potencias nucleares.

(*) Una versión más corta de esta columna fue publicada el 2 de agosto, 2022, en el Diario "El Universo"

https://www.eluniverso.com/opinion/columnistas/china-taiwan-y-ee-uu-nota/

Reducción de inmigración afectó a fuerza laboral en EE..UU.

Los problemas de la cadena logística fueron consecuencia de la reactivación económica luego de la pandemia.

Un efecto poco comentado ha sido el colapso de la inmigración de personal no calificado por el cierre de las fronteras (en EEUU se estima una reducción de 2 millones, que impacta en la caída de la fuerza laboral). Por eso el desempleo se mantiene bajo, y están aumentando los salarios.

En cuanto a deflación, han bajado los precios de varios productos básicos (petróleo, cobre, alimentos), desde sus picos alcanzados en meses anteriores, lo cual se reflejará en menor inflación.

Esto en parte por la contracción en China, que no creció en el último trimestre (cuando lo habitual es tasas de crecimiento de 6-8 % anual).

A successful bond restructuring in Ecuador

By Luis Fierro  (*)

The government of Ecuador announced on August 3^rd that it had obtained the consent (favorable “votes”) of 97.85% of the holders of external debt bonds in favor of a bond swap, much higher than the required 66 % (95.42% in the case of the 2024 bonds, which required 75%). The term was extended until August 7^th to allow those who had not given their consent to join the exchange.

This is undoubtedly excellent news for Ecuador, and the team of Minister Richard Martínez, as well as the country's financial and legal advisers, should be congratulated.

Through the agreement, the series of 10 bonds (originally maturing between 2022 and 2030) will be exchanged for three new bonds, which mature in 2030, 2035 and 2040 (the repayments of capital are distributed in five years, in each case).

There will be an immediate reduction in the amount of principal owed by $ 1.54 billion (a 9% decrease from the original amount of $ 17,375 million), but it is estimated that the arrangement will allow a reduction in net present value (NPV) of 41,7% (based on a discount rate of 10 % per year).

This saving is produced mainly by the reduction of interest rates from an average of 9.2% per year to 5.3% per year, to which is added the aforementioned 9 % reduction of the principal; and the extension of the terms (from an average of 6.1 years to 12.7 years). It also reflects the postponement of the payment of the suspended interest payments in the March-August period ($ 818 million), which will be paid with interest-free bonds between 2026 and 2030.

The discount rate is the opportunity cost of money: you are indifferent to receiving 90 now or 100 a year from now. It is related to the average return on capital in an economy. Some analysts prefer to use a higher rate (12%), although the World Bank uses a discount rate of 5% for the cost-benefit analysis of its projects (currently there are few legal activities that guarantee an annual return greater than 5%).

Two investment funds, GMO and Contrarian Capital, filed a lawsuit in a court in the Southern District of New York, arguing that the government's proposal was coercive. The two funds were part of a "Steering Committee" of holders who claimed to represent about 25% of the bonds, which presented a proposal that was less advantageous to Ecuador. But after Judge Caproni dismissed their arguments and did not give way to a "temporary restraining order" to stop the vote, even the two plaintiff funds accepted Ecuador's initial offer.

All this occurred, in addition, in the midst of the confrontation between the government of Argentina and its bondholders. The Argentine government offered a 47% reduction in net present value, and the bondholders counter-offered a 44% reduction. On August 4 (one day after Ecuador) an agreement was announced for a 45.2% reduction in VPN (using the same 10% discount rate).

The lower discount in the case of Ecuador could be attributed to the fact that the IMF had not considered the country's external debt unsustainable, unlike Argentina.

It is important to clarify is that the restructuring of the bonds will not imply the inflow of new funds to the country. It does reduce the debt service burden, by $ 1,361 million in 2020, and a total of $ 10 billion through 2025 (kicking forward the bulk of amortizations).

But it does not contribute in any other way to reducing the fiscal deficit or closing the financing gap, estimated at $ 4 billion. For this, a new program is being negotiated with the IMF, the same one that will take into account the reduction of the debt in bonds, as well as the fiscal consolidation efforts already made; but will likely seek a greater deficit reduction and structural reforms.

New $ 2.4 billion loans from Chinese banks have also been announced; as well as postponing the payment of the principal of $417 million that was due in 2020-21. In the case of the bilateral debt with China, a reduction in the principal and the interest rate of the current loans is not expected, although the interest rate of new loans is expected to be lower. The G-7 has urged China to join the debt relief efforts associated to the global pandemic under the Paris Club (China does not belong to this creditor forum).

It would be unfortunate if the next government returned to increasing the debt, as the Correa and Moreno governments did. Correa quadrupled the public debt (going from $ 10,234 million in December 2009 to $ 41,894 million in May 2017). Part of the blame also falls to the investors, who until last year lent money to Ecuador given the high expected rate of return, despite the risk of being a country that competes with Argentina and Venezuela for the world record of debt defaults.

(*) A shorter version of this note was published in Spanish in “Diario El Universo” on August 7^th.

https://www.eluniverso.com/opinion/2020/08/07/nota/7932633/reestructuracion-bonos

 

Pandemic and Depression

Pandemic and Depression

By Luis Fierro Carrión (*)

In November 2019 a new human coronavirus appeared in Wuhan, China. It was not produced in a laboratory: it made the jump from an animal to humans (probably from a bat, probably in a market where there were shellfish and wild animals in the middle of tubs of water).

The new coronavirus, named SARS-CoV-2 by the World Health Organization, began to reproduce rapidly among humans, having a high rate of contagion. It causes a severe acute respiratory syndrome, like the original SARS (which appeared in November 2002 in Foshan, China). The mortality rate, despite being about 20 times higher than that of seasonal influenza (2% vs. 0.1%), is lower than that of the original SARS, MERS or Ebola.

The rapid rate of infection, combined with a high but not too high mortality, makes this pandemic resemble that of the "Spanish flu" of 1918-20. Back then, influenza infected a third of humanity in two years, and an estimated 50 million people died (2.7% of the world's population at the time).

Given the similarity of the contagion and death rates, epidemiologists have warned since January that the new coronavirus, which causes the COVID-19 disease, could infect up to 80% of humanity, and of those infected, 2% could die, that is, 123 million people (in Ecuador, 272,000 persons).

This would occur if no control measures were taken, such as imposing isolation of the infected, restricting the movement of people, wearing masks and gloves, etc. The problem would be worse if the contagion were sudden, since it would exceed the capacity of intensive care units and artificial ventilators, which are required in about 5% of the cases. According to INEC, there were 1,183 intensive care beds in Ecuador (72% in Quito, Guayaquil and Cuenca), and 1,745 artificial respirators. If 10% of the population were infected at the same time, some 85,000 beds and respirators would be required. Guayaquil has already seen its hospitals and funeral parlors surpassed.

The official statistics of confirmed cases and deaths are under-reporting the cases, because they reflect the number of tests carried out (15,526 until April 8). In the month of March, there were 1,371 more deaths in Guayas (except Milagro) than the average of January and February (in other provinces the number of deaths decreased, perhaps due to a reduction in accidents and homicides). While not all additional deaths can be attributed to COVID-19, at least 1,000 are likely due to the disease (more than double the official number of confirmed and probable deaths, 482 on April 8). But it also means that the actual number of infections in Ecuador must already be around 50,000 (considering the 2% fatality rate).

It is essential to maintain and reinforce social distancing measures, equip the population with masks, and provide health personnel with professional protection equipment. There is an urgent need to increase the number of intensive care beds and ventilators.

The restrictions will have a severe economic impact. In addition to the fall in the price of oil and other export products, there is the paralysis of sectors of the domestic economy, including restaurants, hotels, tourism, entertainment and transportation; a simultaneous supply and demand shock. 

The economic collapse is likely to be more severe than the 2008 global financial crisis; global GDP could fall between 3 and 6%, and that of Ecuador by 10% or more. Global unemployment could exceed double digits; in Ecuador adequate employment, which was just 40% of the total, will decrease further.

Some economists have proposed measures to alleviate the humanitarian emergency (many families have lost their income); avoid massive bankruptcies of micro and small companies; and reactivate production progressively. There are public and private initiatives to alleviate the crisis. Here are the proposals I made on March 23^rd:

http://economicsandinvestment.blogspot.com/2020/03/propuestas-ante-la-emergencia-sanitaria.html

The pandemic will continue until there is an effective vaccine (at least 12 months), or until the majority of the population has been infected. What will come next will be a "new normal". Teleworking, distance education, and teleconferencing will increasingly weigh. International tourism will not recover in the short term. All this will reduce the demand for fossil fuels.

The sectors to be strengthened will be e-commerce, video-conference systems, distance education, digital finance, 3D manufacturing. The only good thing that will come out will be a reduction in greenhouse gas emissions, which will slow down climate change and reduce deaths from air pollution.

(*) This is a translation of the opinion column I published in Diario El Universo on April 13^th:

https://www.eluniverso.com/opinion/2020/04/13/nota/7811796/pandemia-depresion

Coronavirus, oil prices and Ecuador's risk premium

By Luis Fierro Carrion (*)

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

Climate Change – the defining issue of our time

My contribution (limit: 150 words) on the most significant issue in the 21st Century, for an upcoming publication by the Strategic Foresight Group. Here is their previous publication on the topic

http://strategicforesight.com/publication_pdf/67141BQOT.pdf

Climate Change – the defining issue of our time

By Luis Alberto Fierro 

Without a doubt, the defining issue of the 21st Century, and centuries to come, is climate change. The emission of greenhouse gases has already caused an increase of 0.8 C degrees since pre-industrial times, and future forecasts range from 2 to 6 degrees.

Even an increase of 2 degrees, which most climate scientists consider inevitable, will have devastating consequences. Forecasts regarding the rise of the sea level range from 1 to 6 meters; one meter would be devastating, 6 meters would be catastrophic. Hundreds of millions of people would be displaced (especially in China, India and Bangladesh), at least four nations would disappear (Kiribati, Maldives, Marshall Islands, and Tuvalu), tropical cyclones would increase in intensity, and climate-related events would cause trillions of dollars in losses and damage annually.

Given the magnitude of the problem, additional progress needs to be made, within and outside the UNFCCC negotiation process, to effectively address climate mitigation, adaptation and finance

The slowdown of the Chinese economy

A version of this article was published in Spanish in "Revista Gestión" (http://www.revistagestion.ec/).

The slowdown of the Chinese economy

By Luis Fierro Carrión

In recent months, alarm bells have been going off about the likely slowdown of the Chinese economy, which could have negative effects for the world economy, and in particular for commodity exporters such as Ecuador and other Latin American countries.

During 33 years (1979-2012), the average annual growth rate of China was close to 10 %, and it became the second largest economy in the world.  The GDP per capita increased from $250 in 1980 (measured in purchasing power parity) to $9,185 in 2012 - that is, it had a 36-fold increase!

This extraordinary growth reflected diverse trends:  the reincorporation of China into the world market; the capitalist development (within a Communist political regime); urbanization; industrialization; opening towards foreign direct investment and joint ventures, etc.  There were some particular characteristics of the hybrid Chinese model, such as the expansion of state-owned enterprises (SOE), financed by the equally state-owned development banks.

But in part this accelerated growth simply reflected starting off at such a low base, after many decades of economic stagnation, "cultural revolution", state ownership of the means of production, and military conflicts.

The official growth rate target for 2013 is 7.5 %, but it is likely that this figure will not be met.  The longer term prospects for the future are even less auspicious, as economists believe that China is entering into what is know as the "middle income growth trap".

The rapid urbanization process seems to have reached excessive levels, with high urban rates of pollution:  16 of the 20 most contaminated cities of the world are located in China, and the life expectancy in Northeastern China has started to decrease as a consequence of respiratory and other illnesses associated with pollution.

Workers are starting to demand higher salaries and better working conditions, which will make a model based on cheap labor untenable.  Investment - that is as high as 50 % of GDP - is facing decreasing returns, as the labor surplus is falling.  The Chinese stock market index (SSEA) has fallen by 8 % since December 2012.  The state-owned financial system is facing increasing disequilibrium   And the population is ageing, and growing at a slower rate (with the added problem of having more males than females).

The slowdown in China has already had a negative effect on the prices of commodities.  The price of metal products, for example, has fallen by 6.5 % thus far in 2013, and the price of gold by 26.2 %.  This has affected commodity producing countries, such as Australia, Brazil, Peru and Chile; and it could also affect oil exporters, if the same trend starts to be felt in the oil market (the price of the West Texas Intermediate benchmark has fallen by 7.9 % in the month to November 12, although it is still up for the year).

What can countries such as Ecuador do to confront the Chinese slowdown?  Diversify its productive matrix and its commercial partners; depend less on commodities, and more on the increase of productivity of manufacture and services; depend less, as well, on Chinese financing, which will probably become less available and more expensive as China experiences growing economic and financial difficulties.