Ecuador’s government has gone into overdrive to protect the economy from crashing oil prices, finance minister Fausto Herrera told Emerging Markets on Friday.
Growth rates have slowed to 2.5%-3% and inflation forecasts have increased to 5.5%. Exports earnings, which had been growing by double digits this decade, will be flat at best — and may fall.
“The economy will decline this year because of the steep drop in oil prices and the decision to reduce public spending as a result,” Herrera said.
Ecuador, the smallest member of the Organisation of Petroleum Exporting Countries, last year drew up the budget with oil pegged at $85.70/barrel. It originally planned the 2015 budget at $79.70, but has since lowered it to $40.
Herrera said there was no certainty in the oil market. “There is nothing to say that we could not see oil fall to $20 or $30 a barrel,” he said.
January’s numbers illustrate the problem. Oil export revenue for the month was $598m, down a full 44% from the same month last year. This was all due to price, because output has increased.
The government is responding with a number of measures. It has announced a $1.4bn cut in public spending and this month unveiled a new tariff system for a third of all imports regardless of origin. The new tariffs, which range from 5% to 45%, apply to consumer goods and will be in place through mid-2016.
It also decided in March to place a $750m five year bond at a yield of 10.5%. Herrera said conditions were not optimal, but the government “made the decision because of the uncertainty in oil prices. We could not run the risk of having our fiscal position underfunded.”
The placement was originally for $1bn and Herrera said he was looking at options of going to the market for the remaining $250m, or possibly more.
“We not only want to cover the fiscal gap, but also need to increase reserves in case of other shocks. We know we paid a higher price and that it is short. We are looking at windows of opportunity to see if we can get a better rate and at a longer maturity. It will depend on the price of oil in the coming months,” he said.
A final component is another big change for the government, which is offering infrastructure project concessions. The first projects include toll roads and this year could see the launch of a public-private partnership for the construction of the new port in Guayaquil, the country’s largest city.