FEATURE: Politics weigh on Ecuador's restructuring efforts

FEATURE: Politics weigh on Ecuador's restructuring efforts

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The agreement that Ecuador struck with bondholders in early August has brought short-term relief and much-needed access to international financial markets, but a divisive political landscape at home cast doubts on the country's ability to climb out of debt.

In the agreement, creditors signed on to swap 10 series of bonds that mature between 2022 and 2030 for new notes that come due in 2030, 2035 and 2040, while the government consented to take out a loan from the International Monetary Fund (IMF).

Overriding a legal challenge from a couple of bondholders and staunch opposition from local politicians, the restructuring agreement was a major victory for President Lenín Moreno. But the government still has to negotiate a loan with the IMF, and uncertainty about the future of the agreement in the run-up to presidential elections in February next year could jeopardize the sustainability of Ecuador's debt in the long run.

"The IMF may have some reservations because signing an agreement with this government means that it will be revised by the new government next year," said José Gabriel Castillo, head of the center for economic research at the Escuela Superior Politécnica del Litoral (Espol), one of Ecuador's public universities.

With that in mind, investors said they were not surprised when Ecuador delayed the settlement date for the restructuring agreement until September 1.

"From the beginning, everyone knew that the period to reach an agreement with the IMF was too short," said an investor in Panama.

According to Grace Jaramillo, a postdoctoral researcher at the University of British Colombia, the various political parties that oppose the agreement could form a coalition and win the election next year, possibly in a run-off, and then try to scuttle the plan altogether.

"Candidates are getting ready to register for the elections," she said. "So far, the promises of many candidates have been to challenge the debt restructuring as well as any agreement with the IMF."

Yet despite the differences, all sides are opposed to one thing, raising taxes to cover the debt, Jaramillo added. Business groups argue that they need tax relief during the COVID-19 pandemic, while the opposition view tax increases as an imposition by the IMF.

"This is hampering any possibility of moving forward with long-term economic reform that is sustainable in debt restructuring, economic development and growth," she said.

For Castillo, however, the various sides are too far apart to come to a ready agreement.

"Not only are there no agreements among the elites, economic groups, labor unions and political leaders, their visions of the size of the state, fiscal policy and the flexibilization of labor are diametrically opposed," he said.

If Ecuador reaches an agreement with the IMF, it will likely sign a stand-by arrangement, rather than an extended fund facility, for up to $1.4 billion, Castillo said. A stand-by arrangement is usually paid back within five years, while an extended facility can take up to 10 years.

Earlier in the year, the IMF postponed a scheduled disbursement from an extended facility that Ecuador signed in 2019. The loan, for now, has been canceled.

With the outbreak of COVID-19, the fall in oil prices and the closing of oil pipelines, the government faces increasing difficulties to pay its bills. A budget deficit of 4% of GDP in 2019 is expected to grow to 8% in 2020. The restructuring agreement, however, has relieved some of the pressure by allowing a grace period, doubling the payment period and lowering interest rates, according to Roberto Palacios, finance professor at ESPAE, Epsol's business school in Guayaquil. 

"We were facing impossible payments, and this gives us a beachhead from which to move forward," he said.