Rising Country Risk and Investment Challenges
Due to poor management of the economic and electrical crises, Ecuador’s country risk is considered riskier than countries like Argentina. If the government reduces its country’s risk, the state and private sectors will avoid significant challenges in 2025. Anyone or any company wanting to invest in Ecuador will only do so if they can obtain a return of 20% or more. Likewise, anyone—whether a company or the Ecuadorian government—who wants to issue bonds or raise debt in international markets will have to pay a high interest rate of 20% or more due to the elevated risk.
Ecuador’s Economic Decline and Investment Perception
For this reason, according to Augusto De La Torre, an economist and former chief of the World Bank for Latin America, Ecuador attracts the least foreign direct investment in the region. In 2024, the country is facing a decade of lost economic growth. Due to its political, financial, and legal instability, Ecuador’s risk is seen as high, making the country appear as a risky and unreliable economy. As a result, Ecuador’s country risk is hovering around 1,300 basis points. According to Fausto Ortiz, former Minister of Finance, the external perception is that, amid the economic and electricity crises, more needs to be done to improve the situation.
Country Risk: Ecuador vs. Argentina
During Daniel Noboa’s government (since late November 2023), the country’s average country risk has remained around 1,300 points. In contrast, during the same period, Argentina’s country risk, under Javier Milei, has dropped by nearly two-thirds, from 2,600 points to just under 900. Therefore, as has already been analyzed, Ecuador country risk is currently considered riskier than Argentina’s.
Worsening Fiscal Situation and IMF Projections
“Next year, the fiscal situation will be very serious and almost unmanageable,” recently warned Jaime Carrera, a member of the Fiscal Policy Observatory, about the legacy that the next president will inherit in 2025. Under the current financing agreement with the International Monetary Fund (IMF), the Ecuadorian government was projected to issue bonds in international markets for at least $1.5 billion to $2 billion by 2025 to cover part of its financing needs.
However, the fiscal situation still needs to be resolved despite the VAT hike and the reduction in gasoline subsidies. Additionally, the growing economic crisis, fueled by power outages, has prevented Ecuador from significantly reducing its risk, meaning the country remains outside the ranks of trustworthy borrowers on the international stage.
The Challenge of Raising Funds in International Markets
According to Ortiz, even if Ecuador country risk were to reach Argentina’s level (around 900 points), the cost of raising funds in the external bond markets would prevent any Minister of Finance from pursuing that option, as they would have to pay an interest rate close to 12%. What level of financial cost would be tolerable for issuing Ecuadorian bonds? Ortiz believes it would be 8% or 9%. To achieve this, “our country’s risk would have to be below 500 points, something we will hardly see with the candidates who currently have the greatest chances.”
The Importance of a Clear Economic Plan
Thus, given the lack of proposal and seriousness in the discourse of the presidential candidates, it seems like an impossible mission to significantly reduce Ecuador country risk so that financing—both for the state and the private sector—can flow as needed to boost investment and employment. As Carrera has already pointed out, an economic plan is needed that returns to the roots or foundations of the dollarization process in Ecuador’s early years.
The Dilemma of Borrowing: Multilateral Loans or Debt Swaps?
The question is whether the presidential candidates know the challenge they will face and whether they have actual proposals. If bonds cannot be issued, Ecuador will have to request more loans from multilateral institutions, which, although they offer resources at lower rates, are still expensive to cover for a country like Ecuador with no economic growth. Debt swaps may be done, as the government of Guillermo Lasso carried out, in exchange for the conservation of the Galápagos Islands, but this will not be enough to cover a fiscal deficit of more than $5 billion and arrears of more than $4.5 billion that are expected for 2025.
Political Transitions and Setbacks
In early October 2023, the Ecuadorian risk was above 1,800 points. Still, as soon as the election results were known and Daniel Noboa’s victory over the correísta Luisa González was confirmed, it dropped by 100 points. However, as the elected government began its transition, there were setbacks, such as the appointment of the first Minister of Economy and Noboa’s statements during his first visit to the United States, where he threatened that Ecuador would stop paying its debts if multilateral institutions did not immediately lend money, without conditions. This caused the Ecuador country risk to surpass 2,000 points just days before Noboa took office on November 23, 2023.
Country Risk Trajectory: Rising Again Amid Uncertainty
Only in March 2024, after the approval of the VAT increase to 15%, did the indicator drop below 1,200 points. Since then, there have been no further improvements. The country’s risk is rising again due to investors’ and international banks’ uncertainty about managing the electricity crisis and the growing economic crisis in Ecuador.
Conclusion
Ecuador’s financial situation is facing considerable challenges. Its economic and political instability has led to a high country risk, making it difficult to attract investment and raise debt in international markets. Despite efforts like increasing VAT and reducing fuel subsidies, the fiscal deficit remains significant, and the country is viewed as too risky for investors. The current government still needs to lower the Ecuador country risk significantly. The country can reduce borrowing costs or generate sufficient financing with a clear economic plan or serious reforms. If the situation does not improve, Ecuador will have to rely on multilateral loans or debt swaps, which, though more affordable, still need to be improved to resolve the country’s pressing fiscal needs. Accessing international markets for financing in 2025 looks increasingly likely with drastic changes in policy and leadership.