My top 10 blog posts in 2021 / Mis artículos de blog más leídos en 2021

Mis artículos de blog más leídos en el 2021 / My top 10 blog posts in 2021

# 10 Proposals by Pedro Castillo, candidate in Peru

https://economicsandinvestment.blogspot.com/2021/05/proposals-by-pedro-castillo-candidate.html

# 9 Prohibido Olvidar

https://economicsandinvestment.blogspot.com/2021/04/prohibido-olvidar.html

# 8 Presentation on Climate Change, the Paris Agreement and Climate Finance

https://economicsandinvestment.blogspot.com/2021/11/presentation-on-climate-change-paris.html

# 7 Resumen de mi gestión como Viceministro de Economía de Ecuador

https://economicsandinvestment.blogspot.com/2021/10/resumen-de-mi-gestion-como-viceministro.html

# 6 Disinfodemic

https://economicsandinvestment.blogspot.com/2021/02/disinfodemic.html

# 5 Ecuador: Agreement with the IMF and the presidential candidates

https://economicsandinvestment.blogspot.com/2021/01/ecuador-agreement-with-imf-and.html

# 4 ¿Año Nuevo, Vida Nueva?

 https://economicsandinvestment.blogspot.com/2021/01/ano-nuevo-vida-nueva.html

# 3 Elecciones en Ecuador: Dos opciones opuestas

https://economicsandinvestment.blogspot.com/2021/03/elecciones-en-ecuador-dos-opciones.html

# 2 Ecuador: Acuerdo con el FMI y los candidatos presidenciales

 https://economicsandinvestment.blogspot.com/2021/01/ecuador-acuerdo-con-el-fmi-y-candidatos.html

And my top blog post of 2021 / Y el artículo más leído en 2021:

Green Recovery and Climate Finance in Ecuador

https://economicsandinvestment.blogspot.com/2021/08/green-recovery-and-climate-finance-in.html

What a strange and weird year

The year 2021 was another strange year, affected by the pandemic. I also held four jobs during the course of the year (according to LinkedIn, I worked 14 months, because I ended and started jobs in mid-months).

At the beginning of the year, Vanessa and I had been finalizing 9 months of essentially staying at home (we had returned from Peru and Ecuador in February 2020, when the pandemic hit in the U.S. in March).

However, a new job as a “Climate Finance Expert” for the EuroClima+ Programme of the European Union (through the French Development Agency) required that I had to go to Bogotá, Colombia to start the job.

I was able to get one of the first Pfizer vaccines before travelling (but Vanessa was not able to).

So, I started the new job, but essentially continued to have all meetings via videoconference (Zoom, WebEx, Teams, etc.).

At the end of January, we had to fly back to Miami, to get the second Pfizer dose (and also for a periodical medical treatment). The idea was to stay a few days and fly right back to Bogota. I got the second dose of the vaccine. I thought I had some mild secondary effects. However, when I took a COVID-19 PCR test (to fly back to Colombia), I tested positive. Thankfully, Vanessa (who was not yet vaccinated) did not get it. It was a fairly mild episode, given, I suppose that the first vaccine dose had generated some immunity. I had a bit of fever and malaise, but not more severe symptoms.

In any case, we were forced to stay in Miami. When I finally tested negative, we flew back to Colombia. Bogotá was having a second wave, and many restrictions were in place (including that I could only go to the office a couple of days per week). I was finally able to convince the good folks at the AFD that it did not make much sense to be paying an AirBnB apartment just to work from home (considering especially that all meetings continued to be virtual). So back to Miami we went. Vanessa was finally able to get the first dose of the vaccine.

I should also mention that since July 2020 I had been working remotely (and part-time) for a Mongolian green housing project financed by the Asian Development Bank. Even though initially the idea had been for the team to stay in Ulaanbaatar (Ulan Bator in the good ol’ days), finally we were only able to work remotely.

So, I was merrily working remotely on the two climate finance related projects from Miami, when the Ecuadorian elections took place. I had campaigned in the first round for my friend César Montúfar (contributing to his campaign program), but in the second round I strongly supported Guillermo Lasso. He was the candidate competing with the Correista (Chavista) candidate.

Against initial expectations and polls, Lasso managed to pull off an upset in the second round, in part thanks to expanding his proposals to incorporate some center and center-left initiatives (such as increasing the minimum wage, defending women/LGBTQ/ environmental rights and issues), and committing himself to fighting childhood malnutrition, something that the nominally leftist Correa had failed to do in 10 years, with more than $360 billion in fiscal revenue.

Lasso named as Economy and Finance Minister Simón Cueva, a centrist and prestigious economist, who had previously worked at the IMF and in academic positions.

In a surprising move, Simón asked me to join his team as Vice Minister of Economy. I had been considering public service in Ecuador (I even thought about running for member of the National Assembly, representing migrants in North America), but even so the proposal took me a bit by surprise. I am a center-left economist (leaning towards social-democracy), so I had not expected to join the government of a center-right former banker. But I accepted, given my trust in Minister Cueva, and also the urgent need to address the severe economic, social and health crisis that Ecuador was facing. So, I moved to Quito (I could not serve as Vice Minister remotely 😉).

I had never held public office in Ecuador, except for a six-month period when I was the Representative of Ecuador on the IMF Board of Directors in 2006 (before Correa). I had to regrettably leave my consulting work for EuroClima+/AFD and for the Mongolian ADB green housing project.

As I said, the challenges were manifold. The initial thrust was to put into motion and finance a massive vaccination drive, that ramped up to the point in which 12 % of the total population of Ecuador received a dose in a single week. President Lasso had offered to vaccinate 9 million people in his first 100 days in office, which at the time seemed like an overly ambitious goal, but in fact the goal was met.

The second effort was to renegotiate the terms of an “Extended Fund Facility” with the IMF, that would enable Ecuador to receive $1,500 million in 2021. The initial program sought to increase fiscal revenue by 3 % of GDP (about $3 billion) in 2022; the thought was that this could be accomplished by raising the Value Added Tax (VAT) by 3 points (to 15 %); this, however, is a regressive tax, and it seemed unlikely that the Assembly (dominated by left and center-left parties) would approve it.

The Ministry team was able to negotiate with the IMF to reduce the amount of additional revenue expected and designed a direct taxation fiscal reform that would only affect the 3.5 % of the population with the highest income (as well as the 0.1 % of the population with the highest net worth).

Even though this was a very progressive (some called it a social-democratic) tax reform, in the end the majority of the “leftist” and "center-left" parties in the Assembly did not vote in favor of it, but simply let it become law by not taking a position (under the terms of emergency laws, if a proposed law is not adopted or rejected in 30 days, it comes into force automatically).

A greater effort was required to reactivate the economy, boost private sector investment and employment. In the period through September, sales, tax revenues, private investment and employment all started to recover (from their pandemic lows). The progress in vaccination helped, as well as some multilateral credits that were channeled towards small and medium enterprises. Here is a summary of some accomplishments:

http://economicsandinvestment.blogspot.com/2021/10/resumen-de-mi-gestion-como-viceministro.html

In August, I was notified that a consulting position for which I had applied many months before (in 2020, actually) had been approved. This was a long-term (five years) contract to work as a “Green Economic Policies Expert” for a new EU NDC Facility, which would work to assist developing countries in strengthening their climate action plans (NDCs, as well as long-term low-emissions development strategies, National Adaptation Plans, etc.).

Given the uncertain tenor of my work at the Ministry of Economy and Finance, and the fact that this new job was essentially my dream position, I unfortunately had to leave the Ministry on September 20th.

The European Union funded project required that we move to Brussels. I had to get a short-term visa to be able to travel, and was just about to do so, when there was a new spike in COVID-19 infections in Brussels and new restrictions were imposed. So, it was decided that it did not make sense for me to travel to Brussels and work from a hotel room. We are now in the process to obtain a long-term residence permit for Belgium and will likely travel next year.

So COVID-19 thwarted our travel plans twice; modified jobs to be remote three times; but thankfully did not make us severely ill or worse (thank you Moderna and Pfizer-BioNTech researchers!).

All of our immediate family members have been vaccinated, and not one of them contracted a severe case (although some less immediate relatives did regrettably succumb to the disease).

It has been, without doubt, a strange and weird period, and to be honest, working remotely has become somewhat tiresome and frustrating.

We did see my parents, my siblings, my nieces, my son Pablo, his wife, and my granddaughter Nelia Luna throughout the year, and we will see Vanessa’s family at the end of the year.

A silver lining has been that, in 2020, greenhouse gas emissions fell for the first time in recorded history, although the temperature kept on rising (see this updated presentation on the topic: http://economicsandinvestment.blogspot.com/2021/11/presentation-on-climate-change-paris.html).

I also published my first novel, “The Last Human”, a science fiction novel that is a call to action to confront climate change and other existential threats to humanity (including, yes, pandemics).

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

I hope that by expanding vaccination globally, and continuing to observe other precautions (masks, social distancing, remote working) we will finally defeat the pandemic in 2022.

Happy Holidays!

Elections in Ecuador: Two opposite options

By Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_Eco

On Sunday, April 11, Ecuador will go to the polls to choose between Andrés Arauz, candidate of Correísmo; and Guillermo Lasso, candidate of the CREO-PSC alliance (with the support of other political forces).

These are two diametrically opposed alternatives, in almost all aspects.

While Arauz said in his proposal on "good de-dollarization" that he will raise the Tax on Currency Outflow (ISD) to 27%, and that the Central Bank would grant a "fixed quota" for importers (creating a market distortion, as he himself recognized in his 2009 Master's Thesis); Lasso proposes to eliminate the ISD. Apart from this exchange control (unique in a dollarized economy), Arauz would probably increase tariffs or collect safeguards on imports again.

The correista bloc in the Assembly also proposed to deliver a “universal basic income” in “electronic currency”; candidate Arauz later rejected that proposal and said, instead, that a $ 1,000 bond would be delivered to 1 million families by taking resources from the reserve of the Central Bank of Ecuador. It should be mentioned that these correspond to the reserve of private bank deposits held in the Central Bank; that is, ultimately, it is the depositors' money. Currently, the international reserve does not cover all commercial bank deposits, which is why there is a gap of nearly $ 7 billion between the assets and liabilities of the Central Bank (the Moreno government began to reduce this gap inherited from Correa, but with the pandemic it has increased again).

In more general terms, Lasso's proposal focuses on the generation of productive employment, and he even proposed increasing the monthly minimum wage to $ 500 (from the current $400); while Arauz focuses on the delivery of cash transfers, even at the risk of further reducing the net international reserve, and therefore putting dollarization at risk.

Arauz's pre-announcement that he will increase the ISD to 27% could possibly lead to an outflow of currency in anticipation of this measure.

Lasso has proposed to lower five taxes, while Arauz proposes to increase the income tax and create a wealth tax. Arauz would bet on strengthening a State-centered model, including increasing public spending; while Lasso would seek to strengthen the private sector.

Lasso proposes reducing income tax for companies that create at least 10 jobs.

While Lasso has said that he would strengthen dollarization, Arauz talks about the emission of "electronic currency" and using the resources of the international reserve. By refusing to lower public spending and investment, Arauz will maintain a high deficit and continue with the aggressive public indebtedness process that began in 2014 under Correa; it is likely that his fiscal policy, his proposal to raise the ISD, the potential use of the BCE reserves and the issuance of electronic money would lead to Arauz not receiving the outstanding disbursements from the IMF for $ 2.5 billion. Lasso has said that he would seek to reduce the deficit.

On issues that interest the young and progressive voters of Hervas and Yaku Pérez, such as mining, oil exploitation and the protection of water sources, Lasso's position is closer to the voters of Pérez and Hervas than the practice of Correísmo, which expanded oil and mining extraction, even in places of great biodiversity and environmental vulnerability such as the Yasuní National Park (manipulating the Electoral body under its control for the purpose of thwarting a plebiscite against oil exploration in the Yasuni). Lasso proposes to maximize environmental prevention in mining and oil production, including prior consultation of affected communities.

This extreme extractivism during the Correa decade even led to the murder of several indigenous activists who were opposed to the oil and mineral exploitation, such as Bosco Wisuma, Freddy Taish, José Tendentza, three of the 35 unsolved murders of the Correa government (others include 15 journalists and people who denounced corruption , such as General Jorge Gabela, Quinto Pazmiño and his wife, journalist Fausto Valdivieso, among others).

Correísmo also faces accusations and sentences of corruption, including Rafael Correa, Jorge Glas, ministers Carlos Pareja Yanuzelli, María de los Ángeles Duarte, Ricardo Patiño, Walter Solís, Vinicio Alvarado, Fernando Alvarado, Alecksey Mosquera, María Duarte, Raúl Carrión , Ramiro González and Viviana Bonilla, the Legal Secretary Alexis Mera, the Comptroller Carlos Polit, the assembly members Cristian Viteri and Esperanza Galván, the president of the Central Bank Pedro Delgado, the directors of the IESS María Sol Larrea and Iván Espinel (as well as former IESS President Ramiro González), the director of Petroecuador, Álex Bravo, the Secretary of Intelligence, Pablo Romero, the Secretary of Communication Carlos Ochoa, and the Presidential advisor Pamela Martínez, among others. Of these, 8 were imprisoned, and the rest are at large. It is estimated that the amount of resources lost to corruption reached $ 35 billion.

Arauz has mentioned that he will seek to have the sentences against Correa and other members of his government annulled.

Lasso has never been criminally charged, and, despite the fact that the Correa government investigated his alleged participation in the banking crisis of 1999, he was never accused. Eduardo Valencia, who led the investigation, found presumptions of guilt of Juan Falconí Puig and Pedro Delgado in the embezzlement of the CFN that occurred in 1999-2000, but they were never charged or separated from their positions in the Correa government; Delgado fled to his “son's wedding” in Miami in 2012 and never returned.

Arauz affirms that virtual platforms are natural monopolies, and that is why they must be considered public utility goods, as happened when they turned the right to communication into a public service. This proposal would be aimed at controlling virtual platforms and their users.

The two government plans could be strengthened in terms of environmental issues, sexual and reproductive rights, identity issues, the prevention of animal abuse, and gender and diversity approaches, among other topics of interests of the Millennial and Gen Z voters.

(*) This is a translated and expanded version of the column published in Diario “El Universo” on March 5^th, 2021.

https://www.eluniverso.com/opinion/columnistas/dos-opciones-opuestas-nota/

The image shows the original version of the article by Andrés Arauz on "good dedollarization".

Ecuador: Agreement with the IMF and the presidential candidates

By Luis Fierro Carrión

Twitter: @Luis_Fierro_Eco

On Sunday, February 7, the first round of the elections will take place in Ecuador.

Whoever assumes the Presidency will have to decide whether to continue the Agreement with the IMF (and therefore receive the outstanding disbursements of $ 2.5 billion), suspend it, or to try to renegotiate it.

Although the first two disbursements made in 2020, for $ 4,000 million, did not have significant conditionality (it required an increase in the coverage of the human development bond to 250,000 additional families, as well as to approve reforms to anti-corruption laws); disbursements for the new government will imply a significant fiscal adjustment of 5% of GDP.

The program seeks an increase in tax revenue of 2.5% of GDP (about $ 2.5 billion), along with a reduction in spending of a similar magnitude. With this, it would be expected to reduce the deficit of the non-financial public sector from $ 7.3 billion in 2020 to $ 2.9 billion in 2021.

A 3% value-added tax (VAT) increase is suggested; as well as an increase in personal income tax (PIT) of 5% for income above $ 27,000 per year (and 3% for income below $ 27,000).

The IMF Report (Staff Report) published on December 23 mentions that the three main candidates (Lasso, Arauz and Pérez) have indicated that they might push for fiscal reforms, but it is not clear if any of them have committed to increase VAT or the income tax. The IMF held meetings with Guillermo Lasso, Andrés Arauz and César Montúfar (Yaku Pérez did not agree to meet).

Lasso has said that he will cut taxes, despite a deficit of 7% of GDP; Arauz and Pérez have indicated that they will seek to renegotiate the Agreement, while Arauz has specifically said that he plans to increase current public spending and investment, which would be contrary to the required fiscal adjustment. It would be unlikely that under these circumstances the new disbursement of the Fund would take place, which would worsen the financial gap of 7.7% of GDP expected for 2021. Arauz has also mentioned that he would propose an annual wealth tax of 2%.

The candidate who appears fourth in the average of polls, César Montúfar, has said that he would not approve an increase or a reduction in the Value Added Tax (VAT), but that, if he would be in favor of increasing the progressivity of the income tax, and likewise reduce the exemptions from said tax. He has also proposed a 1% wealth tax for net assets over $ 400,000 (excluding primary residence).

Regarding spending reduction, Lasso mentions the “reduction in the size of the State”. Larger cuts both in personnel costs and investment would be complicated, since they have already been greatly reduced. Public investment has decreased from 8% of GDP in 2018 to 6.1% of GDP in 2020, and a further reduction to 5.4% of GDP is anticipated in 2021. This includes investment in the oil sector, of about 1.5% of GDP, which is required to maintain the current oil production levels.

Public sector salary spending has dropped from $ 10.3 billion in 2018 to $ 9.6 billion in 2020, and is expected to remain at levels close to $ 9.6 billion in 2021-23. Some 50,000 public employees have already been dismissed.

According to Table 6 of the Staff Report, the net effect of the increase in the number of families that receive the cash transfer and the increases in VAT and IR rates would be to increase income in the first 3 deciles, maintain similar income in deciles 4-7 , and reducing incomes in deciles 8-10 (and a reduction of the Gini coefficient, an indicator of inequality, to pre-pandemic levels).

The IMF report estimates that one and a half million people fell below the poverty line due to the pandemic (and that the poor have increased from 30 to 38% of the population).

The Fund recommends continuing efforts to facilitate job creation (allowing more flexibility in working hours, part-time hiring, etc.).

The IMF also suggests continuing the reduction of diesel and gasoline subsidies initiated by Correa and Moreno. The gasoline subsidy would be practically eliminated, and the diesel subsidy would drop from $ 965 million in 2019 to $ 739 million in 2021.

With these efforts, total public debt could fall from 66% of GDP in 2020 to 56.6% in 2025 (without crossing the critical threshold of 70% of GDP).

Another commitment is to increase the independence and autonomy of the Central Bank, and to prevent financing from the ECB to the government (Arauz has announced contrary policies).

Arauz plans to increase the so-called "foreign currency outflow tax" to 27%, which will actually prevent the entry of investment resources. He proposes a "creative monetary policy" to create "electronic money" without any endorsement. These policies also would be contrary to IMF recommendations.

Ultimately, it is likely that, with Arauz or Pérez, the program with the IMF will be suspended, which would lead to an increase in “country risk”, an increase in the interest rate to which Ecuador would have access in international markets. .

The bond restructuring opened a four-year window of lower principal payments (apart from the principal reduction in 2020). The risk would be that a new government begins to borrow again (via bonds or bilateral loans from China), which would put the sustainability of the debt at risk. Similarly, if the program with the IMF is not maintained, the remaining $ 2.5 billion will not be received, which could aggravate arrears in payments to suppliers, salaries, etc.).

Source:  IMF Staff Report published on December 23, 2020.

https://www.imf.org/en/Publications/CR/Issues/2020/12/23/Ecuador-First-Review-Under-the-Extended-Arrangement-Under-the-Extended-Fund-Facility-and-49980

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

 

The Eternal Debt

By Luis Fierro Carrión (*)

Ecuador was born in debt. When the Republic of Ecuador became independent, an agreement was reached whereby the nascent State would assume 21.5% of the debt of the "Gran Colombia", equivalent to £ 1,424,579.

The distribution of this debt was made at a meeting called in Bogotá, which was not attended by the Ecuadorian delegate. The division was made based on population but did not consider where the assets acquired with that debt were (mainly weapons). "Except for the old frigate Colombia, which happened to be in Ecuadorian waters, and 16 thousand pesos, Ecuador did not receive any other material good as a balance of the purchases made with the loans obtained for the struggles for independence (Alberto Acosta Espinosa, “The Eternal Debt”, 1990, p. 64).

The Republic began to walk with the difficulties of a child who carried "a sack of lead on his back," as Agustín Moreno said (quoted by Acosta).

Beginning in 1830, there were moratoriums on the payment of the external debt, renegotiations, proposed arrangements, etc. Ecuador ties with Spain, Venezuela and Argentina as the countries that have had the most defaults in history (a dozen in each case).

Acosta's book tells the story of the Ecuadorian foreign debt until 1990, with its sequence of defaults, negotiations, proposals. On some occasions it offered to pay the debt with "empty lands" in the Amazon or Esmeraldas (in fact there were Native Americans living there), with the Galapagos Islands, with shares in customs revenues, mine rents and other taxes. The effort to deliver "empty lands" in the Amazon even led to military conflicts with Peru, which claimed sovereignty over those territories. Thus, for example, in 1859 the Treaty of Mapasingue was signed, under occupation, which annulled the delivery of territories to bondholders.

As early as 1855, there was speculation with the purchase of the bonds in the secondary market: they could be bought at 4 percent of the nominal value, and, after some payment arrangements were announced, the price would rise to 16%. After the Liberal Revolution, the bonds of the "English debt" were exchanged for new bonds to finance the construction of the railway from Guayaquil to Quito. As the "repurchase" of the independence bonds progressed, their price increased, reaching 45%.

The "English debt" of independence would only be canceled in 1976, in the midst of the oil boom. The oil boom of the 1970s was the first opportunity to eliminate the country's external debt. For example, Norway, which developed the oil fields of the North Sea, not only did not get into debt, but rather accumulated a sovereign investment fund starting in 1990 that by 2020 had reached a value of 1,186,000 million dollars in assets (more than a trillion dollars).

But Ecuador, whose external debt had been reduced to just $ 241 million in 1970 (15% of GDP), began to borrow aggressively, partly to finance infrastructure works such as hydroelectric dams, and partly for military spending, reaching $ 10,283 million. in 1987 (109% of GDP).

The second opportunity to eliminate the debt occurred during the Correa government, in the years 2007-2016, when oil prices rose, generating $ 95,581 million in revenue for the treasury. In fact, in 2007, the (small) balance of the debt with the IMF was canceled.

But, instead of canceling foreign debt and accumulating savings and investment funds; the Correa government carried out a moratorium, not due to inability to pay, but to manipulate the market (so much so that more funds were used to buy back the discounted bonds than would have been the entire debt service expected that year). 

As oil prices fell from 2014, instead of reducing bulky public spending (44% of GDP in 2014), the Correa government began to issue debt aggressively. Thus, public external debt went from $ 8 billion in 2009 (13.2% of GDP) to $ 32 billion in 2017 (32% of GDP) and $ 40 billion in April 2020 (37% of GDP). Of this total, $ 18,7 billion corresponds to the bonds.

In the face of the COVID-19 pandemic, and the collapse of exports and tax revenues, the government asked bondholders to suspend payments until August, with a view to restructuring. It is clear that the Ecuadorian State will not be able to continue servicing the debt in the terms initially foreseen. A grace period is expected to be approved (no principal or interest payments, perhaps until December); a reduction of interest; an extension of the terms (could be extended between 5 and 7 years); and possibly a reduction in the principal amount (a 15 % reduction of the principal).

The Barclays investment bank, in an analysis of the issue, indicated that a 46% reduction in the net present value of the bonds could be obtained, combining a capital reduction, a grace period, lower interest rates (which it estimates could rise from 0% in 2020 to 6% after 2023), and longer terms. The International Monetary Fund itself has indicated that developing countries will require debt relief because of the severe economic recession caused by the pandemic.

But even if an adequate restructuring occurs, the external debt is likely to continue to affect the life and economy of the country for generations to come (unless steps are taken to create a savings and investment fund in a future oil or mining boom).

(*) This is an extended version of an opinion column published in Spanish in Diario El Universo of Ecuador, on July 3, 2020.

https://www.eluniverso.com/opinion/2020/07/03/nota/7892709/deuda-eterna

 

 

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  

Quarantine, Death and Reactivation

By Luis Fierro Carrión (*)

There is an etymological similarity between the Spanish (or Italian) words "quarantine" and "lent" (cuaresma).

For Christians, Lent is a 40-day period of penance, reflection, fasting, and abstinence, between Ash Wednesday and Holy Thursday.

Jews commemorate Passover, which was the liberation from slavery in Egypt and the survival of the 10 plagues, including the death of the firstborn, from which the Jews were saved by placing lamb blood on their doorsteps, to indicate their faith (the “Angel of Death” passed over those homes). Christians believe in the death and resurrection of Jesus.

These ceremonies are linked to pagan practices on death and rebirth of life, reflecting the passage from winter to spring in the Northern Hemisphere (Easter eggs and chocolate bunnies reflect this emphasis on fertility).

Quarantine refers to the 40-day isolation of people and property suspected of carrying the bubonic plague in Venice, during the 14th century pandemic (the worst pandemic in recorded history, in terms of percentage of the population that died).

In 2020, a forced quarantine of the population has been put into effect in many countries of the world, starting with China. In the case of Ecuador, these measures were taken as of March 12, with the suspension of classes, mass events and flight restrictions; and a curfew from March 17. We have already had more than 40 days of these restrictions (as of May 4, a system of "traffic lights" was established by municipalities, but as of May 7^th all remained in "red", or full lockdown and curfew).

Despite the restrictions, there were a large number of excess deaths, most of which can be attributed to COVID-19 (perhaps a fraction correspond to people with other illnesses or accidents who did not have access to hospitals, especially in the provinces of Guayas and Santa Elena).

Between January and April, in the province of Guayas there were 10,655 deaths above the average in the same period of 2018-19. The following was Santa Elena, with 613 excess deaths; Manabi 385; Pichincha 308; and El Oro 146; in Santo Domingo de los Tsachilas, Pastaza and Galapagos there were 2-4 excess deaths. In the other provinces, the number of deaths decreased, probably due to fewer deaths from accidents and homicides (for which reason it is also possible that the figure attributable to COVID-19 exceeds 12 thousand).

Considering a case fatality rate between 1 and 2%, this would mean that there have already been more than 600,000 cases of COVID-19 in Ecuador (even with a high case fatality rate of 3%, taking into account the poor health infrastructure , we would have more than 400,000 cases). Considering that until May 6 only 81 thousand tests had been taken, the official figures for COVID-19 cases and deaths have scant meaning.

The economic impact of the quarantine will be devastating. According to Econ. María de la Paz Vela in a seminar organized by the consulting firm Multiplica and Revista Gestión, Ecuador's GDP could fall by 7% (I estimate between 11 and 15%, based on a prolonged recession that would also continue to impact the price of oil and other exports). Adequate employment will fall from 38.8% to 35.4%, while open unemployment would increase to 3.8% to 9%. The poverty rate, which had already risen from 22% in 2017 to 25% in December, would now rise to 35% (reversing a decade of progress).

Tax revenue would drop by $ 7 billion; the fiscal deficit would triple to $ 8,652 million; financing requirements would reach $ 17 billion. This makes unavoidable a process to renegotiate the external debt (with private and bilateral creditors), and rollover the internal public debt. The government has proposed a “Humanitarian Law” to raise funds from people with the higher incomes, and from companies with profits of more than $ 1 million, but the fate of the law in the National Assembly seems uncertain.

Exports would fall by 26%, but imports would only decrease by 13%. Remittances from emigrants would drop by 9%. A reduction of the international reserves is estimated at $ 1 billion.

The IMF approved a quick financing loan for $ 663 million; The IDB has approved $ 700 million, and $ 500 million is expected from the World Bank [plus a $ 6 million grant] and $ 300 million from CAF [later increased to $400 million]. An announced Chinese loan (of up to $2 billion) has not yet crystallized.

Resources will be required for economic reactivation. The creation of a guarantee fund for bank loans to SMEs has been proposed, with resources from IDB Invest, IFC, CAF, EIB and other entities.

A gradual reactivation requires making way for Internet sales, home delivery or pick up at the door of stores, and home delivery of food and prepared food.

(*) This is the English translation of an opinion column published on May 11th in Diario El Universo of Ecuador:  

https://www.eluniverso.com/opinion/2020/05/11/nota/7837575/cuarentena-muerte-reactivacion