So remembering back to Macroeconomics 101, it looks like Noboa is doomed...
We can estimate what will happen over the next few years using the fundamental Balance of Payments identity: Change in FX reserves = Current Account Surplus (net trade + foreign income) + Capital Account + Financial Account (e.g. foreign direct investment, portfolio investment, new loans)
Let’s look at 2024-2027, and say we have a GDP of $110bn and real growth of 2%
Debt: $11,353 million is maturing 2024-2027 from official multilateral bilateral sources (IMF, World Bank China) – we can make the very positive assumption that all of that will be replaced by new loans, so call it 0 net. Then we have $2144mn of private external debt, e.g. bank loans and Eurobonds; Ecuador is too risky to issue new debt so these will have to be paid from reserves. There's also $ 9,383mn of domestic debt maturing which I will assume will just be replaced with new domestic debt, so net zero.
Interest: External+Internal government debt interest on everything through 2024 to 2027 = $10.765bn ($2.8bn domestic debt interest + $7.9bn external debt interest)
Trade: We can say Ecuador will probably run a surplus of +$1.5bn per year, down from 2-3bn before, given the closure of Block 43 and lower oil prices. Worth remembering that the current account = savings investment balance, most of which is driven by spending; reducing the fiscal deficit would make the public savings and investment balance more positive which would make current account more positive. If you're
only worried about debt sustainability, Noboa's policy of cutting taxes (and hence increasing imports) is insane. Ecuador is a relatively open economy (~27% exports to GDP) so debt is fundamentally quite sustainable despite solvency issues; external debt is fundamentally a claim on reserves and export proceeds; thus fundamentally different from domestic debt so in worst case Ecuador could generate necessary dollars by shrinking domestic demand to compress imports while keeping exports high.
Foreign Invesment: assume $800mn yearly foreign direct investment if Noboa’s reforms succeed.
So we get, for 2024-2027
Change in reserves = Current Account + Capital Account + Financial Account= (Trade Surplus + Other foreign income such as remittances + FX debt interest) + (Capital Account) + (Net foreign loans + foreign direct investment + portfolio investment)
= ($1500mn*4 + -10765) + (0) + (-2144 + 800*4 + 0)
= (-4765) + (0) + (1056)
= -$3709mn
Ecuador has $6bn of reserves now, so 6-3.709 = $2.3bn reserves end-2027. Because of dollarisation the central bank needs 2,910 million in reserves (total deposits from public/private financial entities) to keep the banking system running.
Hence Ecuador will default in 2026-2027. And it gets worse…
I haven’t accounted for the non-interest part of the fiscal deficit; this year’s fiscal deficit will be ~4.2%, and if Noboa cuts taxes this will get higher. Using the equation total deficit = primary deficit + debt interest, we get primary deficits (fiscal deficit excluding debt interest) of ~$2bn a year. So there’s an extra $2bn*4 =
$8bn that need to be funded somewhere, either from reserves (no reserves) or debt (no-one wants to lend to Ecuador, especially that much). I don't know if Ecuador can add this much ($8bn primary deficit + $2.8bn domestic debt interest + 7.9bn external debt interest) to domestic debt. If we assume that all drains reserves, we get 6-3.709-8 = -$5.709bn in reserves in 2027…
If Ecuador wants to avoid default,
it needs to generate primary surpluses; the IMF program envisaged primary surpluses of 2-3% -
see p28 table 2a. This would bring Debt / GDP to ~42.0% in 2027 from 60% today
I feel terrible for Noboa. He either needs to
1. Default now before Ecuador inevitably drains all of its resources
2. Reverse the block 43 closure (is going to reduce tax revenue by $1.2bn a year) or start extracting way more oil.
3. Raise taxes/cut spending (politically impossible and would probably make things worse) and hope for a growth and export miracle. I would never want to excuse Lasso, but his tax/spending actions seem more justifiable in context.
