Bloomberg 10/12/2014
Fuente: Bloomberg
The South American nation will trim current and investment spending and use credit lines from multilateral lenders to offset lower oil prices, the Finance Ministry said yesterday in an e-mailed response to questions from Bloomberg News. Ecuador is also planning tax reforms to boost government revenue and accelerate private investment and may seek additional financing if crude doesn’t stabilize next year, the ministry said.
With prices for the South American nation’s Oriente crude down 20 percent since congress approved President Rafael Correa’s 2015 budget proposal on Nov. 20, the government has said it would reduce funds for new schools and police stations before sacrificing outlays on oilfields and so-called strategic projects needed to generate revenue. Correa, a 51-year-old former economics professor, is also planning a trip to China in January to seek new loans to help offset lower crude prices, the Finance Ministry said.
“The planned total of these measures is in the range of $1 billion to $1.5 billion, without additional financing,” the ministry said in the statement. The government “will search for additional funding in the event that the price of oil doesn’t stabilize during the execution of the 2015 budget.”
Lost Revenue
Ecuador, which defaulted on $3.2 billion of foreign debt in 2008 after crude tumbled 58 percent, will lose an additional $2.5 billion in oil revenue next year if prices remain at current levels, according to Siobhan Morden, head of Latin America strategy at Jefferies LLC.
Roberto Villacreses, a research analyst at the Ecuadorean Institute of Political Economy, estimates extra financing needs may rise between $3 billion and $4 billion.
The drop in crude prices “implies billions in either cutbacks or new financing, which poses a difficult adjustment for the small size of the Ecuador economy,” Morden said in an e-mailed note to clients yesterday before the Finance Ministry’s announcement. “The alternative to pro-fiscal tightening is the politically more palatable option of sourcing funding with plans for an official trip to China.”
Crisis Costs
Ecuador, the smallest-producing member of the Organization of Petroleum Exporting Countries, has relied on higher taxes and loans from China and multilateral lenders such as the Inter-American Development Bank to help fund spending since Correa took power in 2007. The government hasn’t saved any of the windfall profits from an oil boom that drove prices for its crude to a 10-year high of $133 a barrel in 2008. Instead, it will use credit lines to offset the drop in oil, Correa told reporters Nov. 25 in Guayaquil.
“We are prepared, but that doesn’t mean that we’ll get out of a crisis without costs,” Correa said. “The adjustment variable in the case of a reduction in the price of oil is the investment budget. If we planned 200 new schools, it will only be 150.”
The government can reduce the budget by as much as 15 percent without seeking congress’s approval.
West Texas Intermediate crude has fallen 37 percent this year to $62.15 a barrel as of today while Ecuador’s Oriente oil has dropped 44 percent, data compiled by Bloomberg show.
Bond Decline
As oil fell, the Andean nation’s bonds have dropped to record lows, pushing borrowing costs higher. Ecuador’s benchmark dollar debt due in 2024 extended losses today with yields rising three basis points, or 0.03 percentage point, to 8.93 percent as of 9:03 a.m. in New York. That’s the highest level since the notes were sold in June.
While decreasing spending on social programs such as new schools may have political costs, cutting funds for oil investments or a series of planned hydroelectric dams designed to reduce costly fuel imports would sap future revenues that have long-term benefits, Juan Lorenzo Maldonado, an economist at Credit Suisse Group AG, said yesterday in a telephone interview from New York.
“Cutting social programs is always something that’s socially and politically sensitive,” Maldonado said. “If you are able to communicate to your population the need and the whys of your position, then you may very well be able to do it without getting too much social disagreement.”
To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Robert Jameson, Dennis Fitzgerald
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