The Government of Daniel Noboa will have to pay at least $5.38 billion of external debt until 2025. But the greatest payment pressure is in 2026 and 2027.
Ecuador’s total public debt amounts to $75.227 billion until August 2023, which is equivalent to 62% of the country’s Gross Domestic Product (GDP).
Although the country’s debt has fallen, representing 71% of GDP when Guillermo Lasso assumed the Presidency, the payment of these million-dollar loans continues to be a challenge for subsequent governments.
In fact, between 2024 and 2029 the State will have to make the largest payments on external loans.
The State will have to pay $21.0539 billion for external debt between 2024 and 2029, without including interest.
To understand the magnitude of that figure, it can be said that it is almost equivalent to the income that the State receives in one year and that in 2023 it will be $23.662 billion.
On the other hand, the internal debt is not so worrying, as it gives more room for maneuver to the governments in power, says Alberto Acosta Burneo, editor of Analysis Weekly.
And he adds that the State can continue issuing internal debt papers or extending payment terms without falling into the feared ” default ” or cessation of payments.
Default occurs when a country does not pay its debts to international investors on time and with the expected conditions. Ecuador has defaulted nine times since the Republic was formed. That is why investors see the country as a high-risk nation.
But how much of the foreign debt will the Government of Daniel Noboa have to pay and why did it already warn that between 2026 and 2027 Ecuador could fall into default again?
Will Ecuador default on its debt?
When Noboa told investment banks and international organizations, during his tour of the United States, that Ecuador could fall into default between 2026 and 2027, the alarm bells went off.
In response to these assertions, Ecuador’s country risk grew from 1,749 on November 6th to 1,993 points on November 9, 2023, when Noboa’s tour ended.
And although on November 10, 2023, the indicator dropped to 1,949 points, it is still a high country risk, the third in the region, after Venezuela (18,192 points) and Argentina (2,476 points).
In theory, Noboa will not face such high external debt payments compared to what is coming after 2026.
Thus, the Noboa Government would have to pay $5.380 billion of external debt between 2024 and 2025, without taking into account interest.
However, in those two years, million-dollar resource deficits are expected to cover the General State Budget, without taking into account the arrears that the Government will leave with the IESS, suppliers and sectional governments.
And this lack of resources will force the Noboa Government to obtain additional loans, explains Andrés Albuja, professor at the SEK International University.
In 2024 alone, the resource deficit in the Budget could be around $8 billion, adds Albuja.
The toughest years: 2025 to 2027
But the biggest problem for the country is that the loan installments (capital payments) of external debt begin to grow, especially after 2025.
In fact, debt amortizations reach their highest peak in 2027, when the State will have to pay $4.2618 billion, not counting interest. This is equivalent to almost four points of GDP.
The payments in those years are high because the longest maturities of the loans that were part of two agreements with the International Monetary Fund (IMF), signed in the Government of Lenín Moreno and in that of Guillermo Lasso, are met.
But also, because in that period the country must begin to pay the first maturities of the capital of the three series of external debt bonds issued during the renegotiation of the debt in bonds, which took place in 2020.
And although Noboa will only be in office until May 2025, he hopes to run for re-election, so those expirations would also be his responsibility, if he wins.
What worried investors the most is that, due to his re-election intention, Noboa would not seek fiscal consolidation so that the deficit in the State Budget does not continue to grow.
Rather, the president-elect would postpone any spending adjustments or tax increases during his short government, so as not to lose popularity, says Acosta Burneo.
In fact, Noboa has already announced that his first tax reform will not contemplate an increase in taxes, but rather a reduction in tax pressure for companies that create new jobs.
With this, debt needs would grow, which worries international and multilateral markets, he adds.
To whom does Ecuador owe more?
Of the $75.227 billion of Ecuadorian debt, 54% corresponds to loans with two types of creditors:
- Multilateral organizations, such as the IMF and the Inter-American Development Bank (IDB).
- External bondholders.
On the other hand, 37% corresponds to the internal debt, where, for example, the debt bonds that the Ministry of Finance has issued and the Biess has purchased are recorded.
Hence, Albuja recommends that the new Government seek agreements to renegotiate the debt. And Acosta Burneo emphasizes that it is necessary to cut expenses, for example, fuel subsidies.
Ecuador’s looming debt challenge may worsen during Noboa’s term
Ecuador finds itself on the precipice of a daunting financial challenge, with the upcoming governments facing the monumental task of repaying a substantial external debt totaling $21.053 billion.
This fiscal hurdle is exacerbated by the fact that the country’s total public debt, as of August 2023, stands at $75.227 billion, equivalent to 62% of its Gross Domestic Product (GDP).
Under the leadership of Daniel Noboa, the immediate concern is the obligation to settle a significant portion of the external debt, amounting to at least $5.38 billion by 2025.
However, the most substantial payment pressure looms in 2026 and 2027. Despite a reduction in the debt-to-GDP ratio from 71% when Guillermo Lasso assumed the presidency, servicing these million-dollar loans remains an ongoing challenge for subsequent administrations.
Debts due over next 6 years almost equal GDP
Between 2024 and 2029, Ecuador faces its most financially strenuous period, necessitating payments totaling $21.0539 billion for external debt, excluding interest. To contextualize the magnitude of this figure, it is almost equivalent to the annual state revenue, projected to be $23.662 billion in 2023.
In contrast, the internal debt provides a more flexible fiscal maneuvering space for the government. Alberto Acosta Burneo, editor of Analysis Weekly, asserts that internal debt allows the state to issue papers or extend payment terms without the specter of default, a concern that arises when a country fails to meet its international debt obligations on time and with expected conditions. Ecuador, having defaulted nine times since its formation, is viewed by investors as a high-risk nation.
The looming question revolves around the potential default by Ecuador on its debt.
Daniel Noboa’s statement during his tour of the United States, suggesting a risk of default between 2026 and 2027, raised alarms in the financial community. Consequently, Ecuador’s country risk spiked from 1,749 to 1,993 points by the tour’s end on November 9, 2023, eventually stabilizing at 1,949 points on November 10, 2023, still ranking as the third highest in the region, after Venezuela and Argentina.
Analyzing Noboa’s tenure, the external debt payments between 2024 and 2025 are projected to be $5.38 billion. However, resource deficits are anticipated, prompting the government to seek additional loans to cover budgetary shortfalls. In 2024 alone, the budget deficit could hover around $8 billion, according to Andrés Albuja, a professor at the SEK International University.
The pivotal challenge arises in the years 2025 to 2027, as external debt repayments escalate, reaching a peak of $4.2618 billion in 2027, excluding interest. These payments are driven by the extended maturities of loans from agreements with the International Monetary Fund (IMF) and the repayment of the first series of external debt bonds issued during the 2020 renegotiation.
Critics fear new debt
Investor concerns heighten due to Noboa’s reelection ambitions, potentially hindering fiscal consolidation efforts. Critics fear that, in a bid to maintain popularity, the president-elect may postpone necessary spending adjustments or tax increases, further exacerbating the debt crisis. Noboa’s announcement of a tax reform that excludes tax increases but focuses on reducing the burden for job-creating companies intensifies these concerns.
The breakdown of Ecuador’s debt reveals that 54% is owed to multilateral organizations such as the IMF and the Inter-American Development Bank (IDB), as well as external bondholders. Internal debt constitutes 37%, encompassing debt bonds issued by the Ministry of Finance and purchased by the Biess. Given this landscape, experts recommend debt renegotiation agreements and expense reduction, including subsidies like those for fuel, as essential measures for the incoming government to navigate this precarious financial terrain.