Ecuador intends to cut spending by about 2% of gross domestic product as President Daniel Noboa grapples with fiscal, debt and security crises, according to his finance minister.
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(Bloomberg) — Ecuador intends to cut spending by about 2% of gross domestic product as President Daniel Noboa grapples with fiscal, debt and security crises, according to his finance minister.
Juan Carlos Vega, 51, said the new administration that took office late last month plans to reduce the number of public contractors and cut inefficiencies at state-run companies to win the support of the International Monetary Fund for a new financing program.
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“There are thousands of fires to put out,” he said in an interview from his office in Quito, describing the state of Ecuador’s finances inherited from the previous administration.
With year-end bonuses for civil servants due in December, Vega’s first weeks running the dollarized economy have been particularly challenging.
Readily available cash in Treasury accounts fell to just $95 million in the first week of the month, the lowest level in 18 years, forcing the ministry to raise $3 billion to pay salaries and local governments through a series of stopgap measures, he said. The emergency plan included the sale of domestic CETES bonds, early income tax payments from local retailer La Favorita CA and other major companies, as well as the delay of billions of dollars in payments to suppliers.
Noboa, 36, took office late November after a tumultuous year that included the dissolution of congress by former President Guillermo Lasso amid a political crisis, which triggered the election of a new president for the remainder of his term ending in 2025. One of the candidates in the race, anti-corruption activist Fernando Villavicencio, was assassinated days before the first-round vote in August. Polls indicate that violent crime remains as the top issue for Ecuadorians, followed by unemployment.
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Investors, meanwhile, remain skeptical about Ecuador’s prospects under Noboa, leaving its bonds deep in distressed levels. The fiscal deficit resurged in 2023 as Lasso’s government unraveled and is expected to end near $5 billion, or roughly 5% of GDP, compared with $1.7 billion a year earlier. With only a few months for Noboa to govern before the next electoral campaign starts, there are doubts about his willingness to make unpopular decisions.
A key test will be whether he’ll roll back fuel subsidies — a move that would likely hurt his reelection chances, but also help the government to honor its debt in 2025, when a heavier repayment schedule kicks in.
IMF Backing
The government would like to sign a standby agreement with the IMF but seeks at least a seal of approval from the Washington-based institution, which would facilitate Ecuador’s access to loans from other sources, Vega said, adding that he intends to visit multilateral lenders in the coming weeks.
Until then, “we’re studying all policy alternatives” for Noboa to pick from “so that when go to visit the multilaterals in January we’ll go with a proposal,” he said.
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By the end of next week, state-owned oil company Petroecuador is expected to sign a deal with auditor Moore Stephens, fulfilling a commitment made during the previous IMF deal that ended a year ago, he added.
In the near term, Vega is working with foreign banks on two facilities to provide urgent liquidity in January. One would tap cash made available by a central bank gold sale which will reduce foreign reserves held in the metal to about 33%, still well above regional averages near 10%, as well as the bank’s 2023 net profit, for a total approaching $480 million. The other would be an oil-backed loan that would provide $600 million to $800 million.
Other key points from the interview:
• Investments in two renewable energy projects are set to go ahead in the first half of 2024 and the environment ministry has cleared a backlog of about 10,000 permits that will support mining development
• The government aims to comply with voters’ decision to shut down a major oil field inside a national park, however that also implies spending cuts and a discussion of options to focus fuel subsidies on the needy
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