Analysis of Ecuador's internal and external debt

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The Ecuadorian public debt or sovereign debt consists of the set of debts that the state maintains against various private organizations or other countries. As of November 19, 2018, the Ministry of Economy and Finance completely modified the methodology to quantify the debt. Thus, the entity in charge sought to reduce the chances of underestimation with respect to public debt. According to the latest statistical bulletin on public debt issued by the ministry, the composition of both external and internal debt was as can be seen in the first graph.

Sovereign debt has grown substantially. The main reason is that the cost of borrowing in foreign markets is extremely high for Ecuador since, due to bad practices by the governments in office, the country risk is in the skies. Thus, we can see that the last record in May 2020 establishes a ratio of 60,53% of the debt / GDP ratio, which exceeds the maximum debt limit of 40% defined in the Constitution.

What will happen to Ecuador's public debt in the coming years?

Ecuador is facing a suffocating stage of economic contraction. The impact of the pandemic has slowed down the country's productive apparatus and has led to considerable increases in poverty and unemployment statistics. However, the government has given the economy a breather through the renegotiation of external debt in bonds. The process ended successfully in mid-2020. Thus, an agreement was obtained with a large group of bondholders that reduces the country's debt by $ 1.500 billion.

What does the agreement consist of?

The agreement foresees a great relief in the payment of the external debt, since this year nothing more will be paid than what has already been disbursed in the first half of 2020. This translates into a saving of 1,361 million dollars. In addition, the interest rate on the bonds will drop from 9,3% to 5,2%, which implies a considerable reduction of 40% in financial cost. Thus, Ecuador will not pay more than 2.000 million dollars each year to its creditors. This doubles the term of the existing debt. The agreement achieved five years exempt from principal payment and two years of grace in interest. The IMF (International Monetary Fund) celebrates this agreement since it explains that they would be the first steps to put the Ecuadorian public debt on a sustainable path.

Public debt in a pandemic scenario

Currently, the business conglomerate and both public and private banks predict positive effects on the country's economic activity due to the renegotiation of external debt. The Minister, Richard Martínez, announced on Monday, July 06, that the debt restructuring will allow obtaining better financing terms for the public apparatus with a high degree of flexibility. Thus, various resources will be released that will allow government authorities to better cope with the impact of Covid-19.

The internal debt will face a clear restructuring process. To enter into context, the internal debt represents 29% of the total financial commitments of the State. As of May, an amount of 16.853,38 million dollars is added. Most of this amount corresponds to government securities that are in the hands of the Central Bank and especially Social Security. Finally, to close, the Minister explained that due to the pandemic, several changes are expected both in terms and in the interest rate.

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