Ecuador Suffers From `Growth Problem,' Won't Meet GDP Forecast, Borja Says
Ecuador faces a “growth problem” and economic expansion won’t meet the government’s 6.8 percent estimate this year because of lower-than-forecast public spending, central bank President Diego Borja said.
Almost six months into the year, the government has spent only about 25 percent of the $21.3 billion budget, Borja said yesterday in an interview in Quito. He said there is no need for Ecuador to quit using the U.S. dollar as its official currency.
Officials will probably lower the estimate for gross domestic product growth at the end of the month after first- quarter data are published, Borja said. President Rafael Correa, who replaced his finance, economic policy and oil ministers in April, said then that government inefficiency was jeopardizing his “citizens’ revolution.”
“To meet the official growth forecast of 6.8 percent this year, we needed to meet a series of conditions, basically a sufficient level of public investment,” Borja, 46, said from his offices in the capital’s colonial center. “This creates a growth problem because it means that we don’t have the necessary dynamism to reach forecasts.”
Since taking office in 2007, Correa’s ruling party rewrote the constitution to give the state greater control over the economy and strip the central bank of its autonomy.
The Finance Ministry’s press office declined to comment and said Finance Minister Patricio Rivera wasn’t available. Correa’s communications secretary, Fernando Alvarado, couldn’t be reached for comment.
The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries widened 0.03 percentage point to 9.74 percentage points as of 6:15 p.m. New York time, according to JPMorgan’s EMBI+ index. Ecuador’s spread has widened 2.05 percentage points this year, compared with 0.51 percentage point for the index. Ecuadorean sovereign debt is the second-riskiest after Venezuela’s among 15 emerging markets tracked by JPMorgan.
The yield on Ecuador’s 9.375 percent bonds maturing in 2015 has risen 91 basis points, or 0.91 percentage point, this year to 11.92 percent, according to JPMorgan Chase & Co. The price has declined to 90 cents on the dollar.
Borja said the government has no plans to stop payments on the bonds, the only foreign debt Ecuador has left after defaulting on $3.2 billion of “illegal” debt in 2008.
“The 2015s are considered legitimate and they will continue being honored,” Borja said.
Ecuador’s economy grew 0.36 percent last year after the price of oil, the nation’s biggest export, slumped and a drought cut electricity production, leading to outages.
The International Monetary Fund forecasts Ecuador’s GDP will expand 2.5 percent this year, compared with 5.5 percent in Brazil, 6.3 percent in Peru and 4 percent for Latin America and the Caribbean as a whole.
The value of Ecuador’s oil exports, which contribute about a quarter of the nation’s revenue, has more than doubled this year through April from the same period a year earlier because of higher prices. Output has declined 1.7 percent through April, according to central bank data.
Falling production and reduced investment by private oil companies will damp growth this year, said Kathryn Rooney Vera, a strategist with Bulltick Capital Markets in Miami.
“Growth is going to be depressed by lack of investment and lack of openness and government intrusion,” Rooney Vera said in a June 23 interview. “Institutional credibility is lacking and investors don’t know if their money is good in that country.”
Correa, a 47-year-old former economics professor, has threatened to seize assets from oil companies that don’t sign new contracts giving the state greater control over production.
Borja has a master’s degree in economics from the Catholic University of Louvain in Belgium. He served as Correa’s economic policy minister before being named interim bank president in December and then permanent bank chief in April. He’s a former head of the nation’s Flower Producers and Exporters Association.
The U.S. Treasury requested a meeting with Borja in April over concerns about a deal between Ecuador’s and Iran’s central banks to boost bilateral trade. Iran agreed to extend Ecuador a $40 million credit line for small and medium-sized businesses, according to a March 2009 statement on Correa’s website. Borja said Iran never deposited any funds with the Ecuadorean bank.
“The government has decided that the central bank won’t accept deposits from foreign banks,” Borja said. “We will comply with UN resolutions, but Ecuador has full sovereignty to maintain commercial relations with any country in the world, including Iran.”
Ecuador is also seeking to strengthen money laundering and anti-terrorism funding laws after being placed on a black list in February by the Financial Action Task Force, a watchdog.
The country was removed from the list today after an Ecuadorean delegation traveled to Europe this week to meet with members of the group, according to a statement on the president’s website. Domestic banks’ financial transaction costs have risen since Ecuador was placed on the list because of increased foreign scrutiny, Borja said.
New central bank regulations increasing the amount of deposits that financial institutions must keep in the country have shored up dollarization, Borja said. Ecuador adopted the dollar as its currency in 2000.
“It’s a system that’s working,” Borja said. “A rigid monetary structure like the dollar obviously limits monetary policy tools, but one has to make a tradeoff.”
Weak regulatory and financial institutions inherited from previous governments would make it hard to switch currencies, Borja said.
“Its difficult to say if in the future we would or wouldn’t” get rid of the dollar, he said. “Any country that wants its own currency needs to have strong monetary institutions. This hasn’t happened yet.”