Ecuador's private sector banks are bracing for what could become a prolonged period of slow loan growth due to the country's severe economic and fiscal problems. As a result, its economy is set to be among the worst performers in Latin America and the Caribbean during 2019-20, as President Lenín Moreno struggles to change the nation's state-led economic model to one driven by the private sector.
The troubled economy is set to have a negative impact on banks' asset quality and profitability, though the strong financial health of the private banking sector should prevent any risk of a major spike in bad loans.
Moreno is currently having one of the toughest jobs of all presidents in Latin America as he is struggling to improve the country's public finances amid an economy that is barely growing while looking over his shoulder at his dwindling approval ratings.
The financing challenges facing Ecuador prompted rating agency Moody's to cut its outlook on the sovereign rating to 'negative' from 'stable' in December, with Fitch Rating making the same outlook change in January.
Fitch estimates that Ecuador needs around US$9bn in financing this year to cover the fiscal deficit, amortizations and anticipated oil sales, and other obligations, and roughly the same for 2020. The government has not yet been able to determine how it will meet a significant part of these needs.
Although Moreno secured a US$900mn loan from China in December, Fitch sees future financing from the Asian giant as uncertain, and international bond issues as a very expensive option given the high interest rates Ecuador would have to pay due to its elevated country risk.
On the domestic front, the government has limited financing options following a legal reform that prohibits the central bank from lending to the finance ministry and limited appetite from the private sector, says Livia Honsel, a credit analyst with S&P Global Ratings.
The increasingly difficult situation has pushed Ecuador closer to requesting financial support from the IMF and a meeting between Moreno and IMF managing director Christine Lagarde at the World Economic Forum's annual meeting on January 23 was interpreted by analysts as the first step towards such an agreement. A deal with the IMF is "on the cards" said Capital Economics after the Moreno-Lagarde meeting and the Ecuadoran authorities have recognized publicly that they now see the IMF as a real option under the right financing conditions.
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