Bailout Risk Grows for Ecuador After Worst Earthquake in Decades

  • Magnitude 7.8 earthquake killed 433, injured 4,027 on Saturday
  • Worsening recession seen hobbling government reconstruction

Before a 7.8-magnitude earthquake struck Ecuador on Saturday, the South American nation’s finances were already in tatters as the government struggled to meet payments to municipal authorities, oil companies and even cancer hospitals. Cut off from global bond markets, President Rafael Correa must now find enough money to rehouse thousands.

As volunteers continue to rescue victims from the rubble of collapsed homes and buildings on Ecuador’s Pacific coast, doubts are growing about the country’s ability to pay for the reconstruction. The nation is already in its worst recession since the financial system collapsed in the late 1990s, and international reserves are at their lowest levels in almost seven years.

The damage, which left at least 433 people dead, 231 missing and more than 4,000 injured, may cost between $15 billion and $30 billion to repair, based on estimates of losses from the 2010 earthquakes in regional neighbors Haiti and Chile, said Edward Glossop, an economist at Capital Economics. The disaster will probably deepen the recession, forecast by the International Monetary Fund to reach 4.5 percent this year, and recovery efforts will be hobbled by the lack of savings, he said. Correa said Tuesday reconstruction may cost as much as $3 billion and cut gross domestic product by up to 3 percentage points, according to Sky News.

“It just makes the task even harder,” Glossop said Monday in a telephone interview from London. “You will need even more funds to be able to finance new construction work that needs to happen in order for the economy to recover from the earthquake.”

Financing Reconstruction

The nation’s geophysical institute said the quake was centered near the coastal town of Pedernales in Manabi province, about 170 kilometers (106 miles) west-northwest of the capital, Quito. The institute reported “considerable damage” and registered more than 230 aftershocks, one measuring 6.1 on the Richter scale.

The two hardest hit provinces, Manabi and Esmeraldas, have about 2 million residents combined, many now isolated from outside help by mudslides and crumbled roads. Because of the lack of emergency resources, the government has had to rely in part on local volunteers to supply everything from vehicles and heavy machinery to airplanes and helicopters. 

The area’s tropical climate and long growing seasons had helped make Ecuador the world’s biggest exporter of bananas and cocoa beans used in fine chocolate.

Funds Available

The Finance Ministry has $300 million in emergency funds available and will also use contingent financing to help pay for reconstruction, Vice President Jorge Glas said Sunday. A day later, Finance Minister Fausto Herrera said the government doesn’t have a damage estimate yet, but that the nation has emergency credit lines for about $600 million with regional multilateral lenders like the World Bank and the Inter-American Development Bank to help with reconstruction. The IMF said Sunday it stands ready to help Ecuador as needed.

The Finance Ministry, which expects a budget deficit of $3.4 billion this year, also announced Monday evening it had signed a $2 billion loan with the China Development Bank, but said the funds would be used to pay for the government’s annual investment plan, with no mention of the earthquake. The ministry’s press office didn’t respond to telephone and e-mailed requests for comment about how the government plans to finance the reconstruction.

Still, while the humanitarian crisis is dire, the lack of damage to the nation’s oil infrastructure and major urban areas should ease the recovery, said Siobhan Morden, head of Latin America fixed-income strategy at Nomura Holdings. Ecuador’s bonds, which fell by the most in three weeks on Monday, are probably more sensitive to fluctuations in global energy prices than to the fallout from the earthquake, she said.

“It seems to be relatively isolated,” Morden said in a telephone interview Monday from New York. “If it’s not hitting the main contributors to growth of the economy, then I think the markets will probably just be cautious, but not selling.”

Government Options

Ecuador’s bonds due in 2024 fell 1 percent on Monday. The notes were down 0.4 percent to 80.793 cents on the dollar for the week as of 2:30 p.m. New York time, according to data compiled by Bloomberg. That pushed up yields on the dollar-denominated notes to 11.66 percent. Oil fell 1.4 percent Monday after talks Sunday in Doha between the world’s biggest producers ended without an agreement to limit supplies.

The financial cost of the earthquake, coming on the heels of the collapse in crude prices, increases the odds that the government will seek an IMF program to help prop up the economy, Eurasia Group analysts Risa Grais-Targow and Agata Ciesielska said in e-mailed research note Monday. Nomura’s Morden agrees, saying the earthquake may be the catalyst that spurs the government to seek help from the fund.

President Correa, a self-described socialist who previously cut ties with the IMF for ideological reasons, will probably try to avoid an IMF bailout until his term ends in May 2017, but the next government may have no choice, Eurasia Group said. The 53-year-old former economics professor, who took power in 2007, is barred from seeking another term in elections scheduled for early 2017. 

Benchmark West Texas Intermediate crude is forecast to trade below $41 a barrel this year and about $45 a barrel in 2017, according to oil-futures data compiled by Bloomberg. Ecuador loses money pumping oil when prices fall below about $39 a barrel because of government fuel subsidies and payments to oil-service companies, Correa said last year. 

“The next government will inherit a very difficult economic outlook,” the Eurasia Group analysts said in the report. “Barring a meaningful rebound in oil prices, an IMF program is inevitable regardless of who wins next year.”

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