Friday, 13 February 2009

Ecuador Again: Citigroup Says Borrowing Needs Remain a 'Connundrum.´ Funding Problems May Lead to Abandonment of Dollarisation

In a report called ''Ecuador: Financing Requirements for 2009 Remain Unknown,´´ Citigroup Inc. economists assert that public sector borrowing requirements for 2009 remain a ''conundrum despite the recent official announcements to the contrary, putting dollarisation at risk.´´ We have said here that President Rafael Correa (photo), despite likening the dollarisation as a necessary evil, had so far tried not to dismantle it. But he now might be trying to do so, by forcing bad events to happen ... Weird, but true. A group of local analysts we are in touch with said the course of developments is so irrational sometimes it looks like Correa would actually be forcing the outcome of some events!

Yesterday, Minister Diego Borja announced that the government had secured a credit line with the IADB for $500 million, of which $100 million would be disbursed in the first quarter. Borja also said that the Correa administration is seeking $1.5 billion from multilaterals to close remaining borrowing requirements
for this year, according to Citigroup. The borrowings would come on top of the $1.2 billion obtained from the social security fund since December. ''Despite the government’s announcements, we believe multilateral financing will be questioned and delayed. Local analysts indicate the IADB officials both in Washington and Quito, still far from reaching a basic understanding, needed to internally activate unconditional and conditional loans for $500 million and $365 million, respectively,´´ said the economists. The problem is, apparently, according to Citigroup, IMF staff who were also present in last week’s meeting with Ecuadorean officials, were asked to issue a letter of assessment before the IADB staff seeks its board approval, where strong resistance is expected from the U.S. government. I doubt the U.S. will oppose the awarding of these loans, but the argument sounds solid.

Bottom line is, financing likely will fall short of the budget needs; Citigroup is predicting such outcome will lead to a reduction in spending of the $13 billion budget. One of the consequences of this move would be a quick abandonment of dollarisation. Why? Citigroup gives a few, interesting reasons: 1) The social security fund has little room for further lending to the government. So, the country will have to look for multilateral funding to make ends meet. CAF is first option (do you remember that Correa was close to defaulting on some CAF loans in December, prompting Standard and Poor's to revise the outlook on the entity's credit ratings to negative from stable? Thanks Rafa!) CAF’ has a huge exposure to Ecuador (21 percent of the total loans are in hands of the country, followed by Peru (18 percent) and Colombia (17 percent).) CAF may not be able to lend that money though ... so ... Citigroup concludes that ''under these circumstances, the president may have no choice but to opt between failing to meet the promised budget, abandon dollarisation, and backtrack on his decision to never accept IMF loans and conditionality.´´

And the analysis continues: ''Oppressed by falling reserves and a stronger dollar, we expect the president to attempt to convey to voters the benefits of abandoning the U.S. dollar towards the second semester.´´ The political power that he now has, which includes control of Congress and the recent implementation of the new constitution drafted by him and his cronies, gives him the edge needed to end with the dollarisation system, which did good to Ecuadoreans by assuring inflation remained within its targets.

1 comment:

  1. Memo,
    Que buena! Me gusto muchisimo tu blog post esta manana sobre el Ecuador. Ya lo envie a varios amigos. Donde puedo conseguir el informe de Citigroup sobre este pais? Me podrias mandar una copia? I would be very grateful, amigo.