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

 

Una exitosa reestructuración de bonos

Por Luis Fierro Carrión (*)

El gobierno anunció el 3 de agosto que había obtenido el consentimiento (los “votos”) del 97,85 % de los tenedores de bonos de deuda externa en favor del canje de bonos (95,42 % en los bonos 2024, que requerían el 75 %). Se amplió el plazo hasta el 7 de agosto para permitir que aquellos que no hubiesen emitido su consentimiento pudiesen sumarse al canje.

Esta una excelente noticia para el Ecuador, y cabe felicitar al equipo del Ministro Richard Martínez, así como a sus asesores financieros y legales.

Mediante el acuerdo, se canjearán la serie de 10 bonos (que originalmente vencían entre 2022 y 2030) por tres nuevos bonos, que vencen en 2030, 2035 y 2040 (amortizaciones de capital distribuidas en cinco años, en cada caso).

Habrá una reducción inmediata del monto del capital adeudado por $ 1.540 millones de dólares (una reducción de 9 %, con respecto al monto original de $17.375 millones), pero se estima que el arreglo permitirá una reducción del valor presente neto (VPN) del 41,7 % (tomando como base una tasa de descuento del 10 % anual). Este ahorro se produce principalmente por la reducción de las tasas de interés de un promedio de 9,2 % anual a 5,3 % anual, a lo cual se suma la reducción mencionada del principal; y la extensión de los plazos (de un promedio de 6,1 años a 12,7 años).  También influye la postergación del pago de los intereses suspendidos en el periodo marzo-agosto ($818 millones), que serán pagados con bonos sin interés entre 2026 y 2030.

La tasa de descuento es el costo de oportunidad del dinero: da igual recibir 90 ahora o 100 dentro de un año. Tiene relación con el rendimiento promedio del capital en una economía.  Algunos analistas prefieren usar una tasa mas alta (12 %), aunque el Banco Mundial para su análisis de costo-beneficio de sus proyectos toma como base una tasa de descuento del 5 % (actualmente hay pocas actividades lícitas que garanticen un rendimiento mayor al 5 % anual).

Dos fondos de inversión, GMO y Contrarian Capital, interpusieron una demanda en una corte del Distrito Sur de Nueva York, argumentando que la propuesta del gobierno era coercitiva.  Los dos fondos formaban parte de un “Comité Directivo” de tenedores que decían representar cerca del 25 % de los bonos, los cuales presentaron una propuesta que era menos ventajosa para el Ecuador. Pero luego de que la Jueza Caproni desestimase sus argumentos y no diera paso a una “medida cautelar” para frenar la votación, incluso los dos fondos demandantes aceptaron la oferta inicial del Ecuador.

Todo esto se producía, además, en medio del enfrentamiento entre el gobierno de Argentina y sus tenedores de bonos. El gobierno argentino ofrecía una reducción del 47 % en el valor presente neto, y los tenedores contra ofertaban una reducción del 44 %. El 4 de agosto (un día después del Ecuador) se anunció un acuerdo para una reducción del 45,2 % en VPN (con la misma tasa de descuento de 10 %).

El menor descuento en el caso del Ecuador podría atribuirse a que el FMI no había considerado insostenible la deuda externa del país, a diferencia de Argentina.

Es importante aclarar es que la reestructuración de los bonos no implicará la entrada de nuevos ingresos al país. Sí reduce la carga del servicio de la deuda, en $1.361 millones en 2020, y un total de $10.000 millones hasta 2025 (pateando hacia adelante el grueso de las amortizaciones).

Pero no contribuye de otra manera a reducir el déficit fiscal ni a cerrar la brecha de financiamiento, estimada en $4.000 millones. Para ello se está negociando un nuevo programa con el FMI, el mismo que tomará en cuenta la reducción de la deuda en bonos, así como los esfuerzos ya realizados de consolidación fiscal; pero seguramente buscará una mayor reducción del déficit y reformas estructurales.

También se ha vuelto a anunciar nuevos préstamos de bancos chinos por $2.400 millones; y se anunció que se diferirán las amortizaciones de capital que vencían hasta julio 2021, por un monto de $417 millones. En el caso de la deuda bilateral con China, no se espera una reducción del principal ni de la tasa de interés de los préstamos vigentes, aunque si se espera que la tasa de interés de los nuevos préstamos sea menor. En el marco del G-7, se ha instado a China a sumarse a los esfuerzos de alivio de la deuda en el marco del Club de París (China no pertenece a este foro de acreedores).

Sería lamentable que el próximo gobierno vuelva a endeudar al país como lo hicieron los gobiernos de Correa y Moreno. Correa cuadruplicó la deuda pública (pasando de $10.234 millones en diciembre 2009 a $ 41.894 millones en mayo 2017).   Parte de la culpa también la tienen los inversionistas, quienes hasta el año pasado prestaban dinero al Ecuador por el alto rendimiento que se ofrecía, pese a ser un país que compite con Argentina y Venezuela por el récord de moratorias de deuda.

(*) Una versión más corta de esta columna se publicó el 7 de agosto en el Diario “El Universo” de Ecuador.

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

Sobre el ingreso básico universal (es mejor un ingreso mínimo garantizado)

Por Luis Fierro

Con la pandemia de COVID-19, ha habido llamadas para establecer un ingreso básico universal (UBI).

Ver, por ejemplo, este artículo de Guy Standing en

https://www.economist.com/by-invitation/2020/05/20/guy-standing-on-how-lockdowns-make-the-case-for-a-basic-income

Andrew Yang también lo convirtió en una pieza central de su (fallida) campaña para la nominación por el Partido Demócrata en EEUU.

Aquí mi reacción:

1. Estoy a favor de un ingreso mínimo garantizado, que ya existe en algunos países europeos (Francia, Alemania y, más recientemente, España).

2. Este ingreso se debe dar a aquellos que ganan menos del ingreso mínimo (que, a su vez, debe ser menor que el salario mínimo, digamos el 70% del salario mínimo). No debe administrarse "a todas las personas, independientemente de sus ingresos", como propone el artículo (o como propuso Yang).

3. Soy más favorable a un "crédito tributario por ingreso laboral" (

4. No estoy a favor de aumentar los impuestos sobre el capital (más allá de revertir los recortes de impuestos del gobierno de Trump).

5. Estoy a favor de un impuesto sobre el patrimonio, para aquellos con un patrimonio neto superior a $ 1 millón (excluyendo su residencia principal). Aunque algunos consideran que el impuesto sobre el patrimonio genera distorsiones, de hecho ya existe en varios países "capitalistas" (como Noruega, Suiza, Países Bajos y España). Muchos otros países, incluido Estados Unidos, tienen el "impuesto a la propiedad", centrado en bienes raíces, y que NO excluye la residencia o propiedades por debajo de un cierto umbral.

6. Un impuesto al patrimonio compensaría a aquellos trabajadores que han perdido sus empleos debido a la automatización (en muchos casos, aumentando la riqueza de los multimillonarios, como Jeff Bezos de Amazon).

7. Aunque me beneficiaría, no estoy a favor de continuar entregando "cheques de estímulo" a la mayoría de la población en EE.UU. (por debajo de un nivel de ingreso). Es mucho más importante extender el beneficio adicional de desempleo, que debería reemplazar la mayor parte del ingreso previo a la pandemia.

8. Los países en desarrollo, como Ecuador, no pueden darse el lujo de proporcionar un generoso ingreso mínimo garantizado (aunque Ecuador actualmente proporciona una transferencia de efectivo de $60 a la mayoría de las familias de bajos ingresos). Propondría eliminar por completo los subsidios a los combustibles fósiles (han sido reducidos sustancialmente por los gobiernos de Correa y Moreno) y, en su lugar, aumentar la transferencia de efectivo (Bono de Desarrollo Humano) y una pensión mínima garantizada (incluso para aquellos que no contribuyeron al sistema de seguridad social).

9. Un impuesto al carbono (un impuesto a las emisiones de gases de efecto invernadero) sería la mejor fuente para financiar un ingreso mínimo garantizado.

Aquí hay un artículo de Paul Buchheit que hace un argumento similar:

https://www.commondreams.org/views/2018/03/19/2-financial-wealth-tax-would-provide-12000-annual-stipend-every-american-household

Foto:  Yuri Keegstra/Flickr/cc

On the universal basic income (I prefer a minimum guaranteed income)

By Luis Fierro

With the COVID-19 pandemic, there have been calls to establish a universal basic income (UBI).

See, for example, this article by Guy Standing in The Economist:

https://www.economist.com/by-invitation/2020/05/20/guy-standing-on-how-lockdowns-make-the-case-for-a-basic-income

Andrew Yang also made it a centerpiece of his campaign for the Democratic nomination.

Here is my reaction:

1. I am in favor of a guaranteed minimum income, as it is applied in some European countries (France, Germany, and more recently, Spain).

2. This income should be given to those who earn less than the minimum income (which, in turn, should be less than the minimum wage - let’s say 70 % of the minimum wage). It should not be given “to all individuals, regardless of income”, as the article proposes.

3. I am more favorable to an “earned income credit” as applied in the United States, that provides an extra-income to low-income workers. This is better, as it creates incentives for working.

4. I am not in favor of increasing capital taxation (beyond reverting the Trump tax cuts).

5. I am in favor of a wealth tax (or equity tax), levied especially on those with a net worth above $1 million (excluding their residence). Though some decry the wealth tax as distorting, in fact it is applied in several “capitalist” countries (such as Norway, Switzerland, Netherlands and Spain). Many other countries, including the United States, have the “property tax”, focused on real estate, and which does NOT exclude the residence or properties below a certain threshold.

6. A wealth tax would compensate those workers who have lost their jobs due to automation (in many cases, increasing the wealth of the billionaires, such as Amazon’s Bezos).

7,  Even though I would benefit, I am not in favor of continuing to hand out "stimulus checks" to most of the population. It is much more important to extend the additional unemployment benefit, which should replace most of the pre-pandemic income.

8. Developing countries, such as Ecuador, cannot afford to provide a generous minimum guaranteed income (although Ecuador currently does provide a cash transfer of $60 to most low-income families). I would propose eliminating the fossil fuel subsidies altogether (they have been substantially reduced by the Correa and Moreno governments), and, in its place, increasing the cash transfer (Bono de Desarrollo Humano) and guaranteed minimum pension (even for those who did not contribute to the social security system). 

9. A carbon tax (a tax on greenhouse gas emissions) would be the best source to fund a minimum guaranteed income.

Here is an article by Paul Buchheit making a similar argument:

https://www.commondreams.org/views/2018/03/19/2-financial-wealth-tax-would-provide-12000-annual-stipend-every-american-household

Photo: Yuri Keegstra/Flickr/cc

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

 

 

La Deuda Eterna

Por Luis Fierro Carrión (*)

El Ecuador nació endeudado.  Al independizarse la República del Ecuador, se llegó a un acuerdo mediante el cual el naciente Estado asumiría el 21,5 % de la deuda de la “Gran Colombia”, equivalente a 1’424.579 libras esterlinas.

La distribución de esta deuda se realizó en una reunión convocada en Bogotá, a la cual no asistió el delegado ecuatoriano. La división se hizo en base a la población, pero no tomó en cuenta en dónde estaban los activos (principalmente armamento) adquiridos con esa deuda. “Salvo la vieja fragata Colombia, que casualmente se encontraba en aguas ecuatorianas, y 16 mil pesos, el Ecuador no recibió ningún otro bien material como saldo de las compras realizadas con los empréstitos conseguidos para las luchas de la Independencia (Alberto Acosta Espinosa, “La Deuda Eterna”, 1990, p. 64).

La República empezó a andar con las dificultades de un niño que llevaba “un quintal de plomo sobre las espaldas”, al decir de Agustín Moreno (citado por Acosta).

A partir de 1830, se sucedieron moratorias en el pago de la deuda externa, renegociaciones, propuestas de arreglos, etc.  Ecuador empata con España, Venezuela y Argentina como los países que más moratorias de deuda externa han tenido (una docena en cada caso).          

El libro de Acosta narra la historia de la deuda externa ecuatoriana hasta 1990, con su secuencia de “defaults”, negociaciones, propuestas. En algunas ocasiones se ofreció pagar la deuda con “tierras baldías” en la Amazonía o Esmeraldas, con las Islas Galápagos, con participaciones en los ingresos de la aduana, rentas de minas y otros tributos.  El empeño de entregar “tierras baldías” en la Amazonía suscitó incluso conflictos militares con el Perú, que reclamaba la soberanía sobre dichos territorios. Así, por ejemplo, en 1859 se firmó bajo ocupación el Tratado de Mapasingue, que anulaba la entrega de territorios a los tenedores de bonos.

Ya en 1855 se jugaba con la compra de los bonos en el mercado secundario: se podía comprar al 4 por ciento del valor nominal, y, tras algunos arreglos de pago, el precio subía al 16 %. Luego de la Revolución Liberal, se canjearon los bonos de la “deuda inglesa” por nuevos bonos para financiar la construcción del ferrocarril de Guayaquil a Quito. Conforme avanzaba la “recompra” de los bonos de la independencia, su precio subía, hasta llegar a 45 %.

La “deuda inglesa” de la independencia recién sería cancelada en 1976, en medio del boom petrolero. 

El “boom petrolero” de los años setenta fue la primera oportunidad de eliminar la deuda externa del país. Noruega, por ejemplo, que desarrolló los campos petroleros del Mar del Norte, no solo que no se endeudó, sino que acumuló a partir de 1990 un fondo de inversión soberano que para el 2020 había alcanzado un valor de 1’186.000 millones de dólares en activos.

Pero el Ecuador, cuya deuda externa se había reducido a apenas $241 millones en 1970 (15 % del PIB), comenzó a endeudarse agresivamente, en parte para financiar obras de infraestructura como represas hidroeléctricas, y en parte por gasto militar, llegando a $10.283 millones en 1987 (5,3 veces las exportaciones, 109 % del PIB).

La segunda oportunidad para eliminar la deuda se produjo durante el gobierno de Correa, en los años 2007-2016, cuando los precios del petróleo subieron, generando $95.581 millones de ingresos para el fisco. De hecho, en 2007, se canceló el saldo de la deuda con el FMI.

Pero, en lugar de cancelar la deuda y acumular fondos de ahorro e inversión; el gobierno de Correa efectuó una moratoria, no por incapacidad de pago, sino para manipular al mercado (tanto es así que se utilizaron más fondos para la recompra de los bonos con descuento que lo que hubiese sido el servicio de la deuda previsto ese año).

Al caer los precios del petróleo a partir de 2014, en lugar de reducir el abultado gasto público (44 % del PIB en 2014), el gobierno de Correa comenzó a endeudarse agresivamente.  Así, la deuda externa pública pasó de $8 mil millones en 2009 (13,2 % del PIB) a $32 mil millones en 2017 (32 % del PIB) y $40 mil millones en abril 2020 (37 % del PIB). De este total, corresponde a los bonos $18.747 millones.

Ante la pandemia de COVID-19, el colapso de las exportaciones y de los ingresos fiscales, el gobierno solicitó a los tenedores de bonos una suspensión de los pagos hasta el mes de agosto, con miras a una reestructuración. Está claro que el Estado ecuatoriano no podrá seguir atendiendo el servicio de la deuda en los términos previstos inicialmente. Se espera que se apruebe un período de gracia (sin pagos de capital o intereses, quizás hasta diciembre); una reducción de intereses; una extensión de los plazos (se podrían extender entre 5 y 7 años); y posiblemente una reducción del monto de capital (una “quita” del principal del 15 %).

El banco de inversión Barclays, en un análisis del tema, indicaba que se podría obtener una reducción del 46 % en el valor presente neto de los bonos, combinando una reducción del capital, período de gracia, intereses más bajos (que estima podrían subir de 0 % en 2020 a 6 % después de 2023), y plazos más extensos.  El mismo Fondo Monetario Internacional ha indicado que los países en desarrollo requerirán un alivio de la deuda como efecto de la grave recesión económica causada por la pandemia.

Pero aun si se da una reestructuración adecuada, es probable que la deuda externa continúe afectando la vida y la economía del país por generaciones (a menos que en un futuro boom petrolero o minero se tomen medidas para crear un fondo de ahorro e inversión).

(*) Una versión resumida de este articulo fue publicada en el Diario El Universo de Ecuador el 3 de Julio, 2020.

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

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