Ecuador: Assessment of Financial Risks to the Fund
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
31 May 2024
eISBN:
9798400277542
Language:
English
Keywords:
Peak fund Exposure; fund GRA exposure; EFF arrangement; fund financial support; credit exposure; Credit; Debt service; Debt service ratios
Download PDF (715.6 KB)

ECUADOR

Title Page

ECUADOR

ASSESSMENT OF FINANCIAL RISKS TO THE FUND

May 23, 2024

Approved By

Zuzana Murgasova (FIN) and Bergljot Barkbu (SPR)

Prepared by the Finance and Strategy, Policy, and Review Departments.

Contents

  • INTRODUCTION

  • PAST FUND ARRANGEMENTS

  • DEBT SITUATION AND OUTLOOK

  • FINANCIAL IMPLICATIONS OF THE PROPOSED ARRANGEMENT FOR THE FUND

  • ASSESSMENT

  • TABLES

  • 1. Proposed Access and Phasing Under the Extended Fund Facility

  • 2. IMF Financial Arrangements and Fund Exposure, 1988-2038

  • 3. Capacity to Repay Indicators

  • 4. Impact on GRA Finances

  • FIGURES

  • 1. Debt Ratios for Exceptional Access Arrangements

  • 2. Approved GRA Exceptional Access Cases Since September 2008

  • 3. Projected Credit Outstanding Path Under Existing Arrangements and Proposed EFF

  • 4. Credit Outstanding in the GRA Around Peak Borrowing

  • 5. Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases

  • 6. Credit Concentration of Fund GRA Exposure

Introduction

1. The Ecuadorian authorities have requested access under the Extended Fund Facility (EFF) arrangement equivalent to 430 percent of quota (SDR 3 billion). Building on the 2020 EFF, the new 48-month EFF-supported program will aim to strengthen fiscal sustainability, enhance financial stability and integrity, and rebuild liquidity buffers, safeguard dollarization and macroeconomic stability, and advance the structural reform agenda to promote sustainable and inclusive growth. The proposed access would meet Ecuador's residual financing needs after factoring in an ambitious fiscal consolidation and financing from international financial institutions and official bilateral creditors, and renewed access to international capital markets. The program would start with tri-annual reviews during 2024-25 and shift to semi-annual reviews during 2026-28. The phasing would be driven by the size and timing of the estimated financing gaps and would be broadly aligned with the fiscal adjustment effort.

2. The proposed program would be subject to the General Resources Account (GRA) Exceptional Access (EA) Framework. Given that Ecuador's existing Fund credit stands at SDR 5.8 billion (835 percent of quota), already exceeding normal cumulative access levels, the new arrangement would be subject to the Fund's exceptional access policy.

3. This note assesses the financial implications of the proposed arrangement for the Fund. The assessment is provided in accordance with the policy on EA and based on the assumption that all four exceptional access criteria are met.1

Past Fund Arrangements

4. Ecuador has had several Fund arrangements in the last decade (Table 2). In July 2016, the Executive Board approved a disbursement of SDR 261.63 million (37.5 percent of quota) under the Rapid Financial Instrument (RFI) to help the country meet an urgent fiscal and balance of payments need following an earthquake that caused significant damage to infrastructure, housing, and agriculture. In March 2019, an EFF arrangement was approved for an amount of SDR 3,035 million (435 percent of quota) to address Ecuador's systemic vulnerabilities, including high non-oil primary deficit and rising public debt. During that program, despite steps taken by the authorities to improve public finances, shortcomings in institutional capacity and a lack of coordination among government entities led to deficiencies in the compilation of government finance statistics. The resulting misreporting of fiscal data after the completion of the combined second and third reviews masked significantly larger than targeted fiscal deficits. Only three out of eleven scheduled reviews were completed before the program went off track, with only 145 percent of quota drawn (one-third of the total amount approved in 2019) before cancellation of the arrangement in April 2020.

5. In 2020, Ecuador requested Fund financial support to address the impact of the COVID-19 pandemic. On May 2020, the Executive Board approved Ecuador's request for emergency financial assistance under the RFI for an amount of SDR 469.7 million (67.3 percent of quota) to meet the urgent balance of payments needs stemming from the outbreak of COVID-19 before a more comprehensive arrangement could be negotiated. During the summer of 2020, Ecuador completed a successful restructuring of global bonds with parameters structured around the debt sustainability targets provided in the RFI. In September 2020, the Executive Board approved a 27-month EFF with total access of SDR 4,615 million (661 percent of quota) to help restore macroeconomic stability, expand social assistance programs in the aftermaths of the COVID-19 pandemic, ensure debt sustainability, close the financing gap, and lay the foundations for sustainable growth. Access under the arrangement triggered EA policies, and the exceptional access criteria were considered to be met. The program ended in December 2022 and all reviews were completed.

Debt Situation and Outlook

6. Following a rapid increase over 2014-2020, Ecuador’s public debt stock has declined since 2020. Ecuador's public debt increased rapidly between 2014 and 2020 from under 30 percent of GDP to over 60 percent of GDP. However, since 2020, the public debt-to-GDP ratio has declined to an estimated 55.3 percent of GDP at end-2023, driven, in part, by the debt-for-nature swap that lowered the amount of international bonds outstanding by US$ 970 million, coupled with the difficulty in accessing new financing (Ecuador has not accessed the market since 2019), that also forced the government to draw down deposit buffers.

7. Ecuador’s public debt remains sustainable but not with high probability.2 The fiscal and debt projections assume successful implementation of the EFF-supported program and a return to international capital markets in 2025. Under the program, the primary balance of the non-financial public sector would turn to surplus in 2025, increasing to about 2 percent of GDP in the medium term. This fiscal adjustment is expected to contribute to a sustained decline in the public debt-to-GDP ratio, which is forecasted to decline from 55.3 percent in 2023 to 40 percent by 2032, the debt limit embedded in the organic budget code. However, the planned primary consolidation under the program, while necessary to restore fiscal sustainability, is ambitious compared to cross-country historical realizations. Downside risks to the fiscal and debt outlook stem mainly from implementation capacity of the fiscal adjustment. Risks to revenue mobilization partly arise from the possibility of growth underperforming, given the uncertainty due to the security situation, as well as possible disruptions in oil production. Risk mitigating factors in the debt sustainability assessment include the large share of multilateral and bilateral official debt, with comparatively low rollover risk and long maturities.

8. Ecuador’s total external debt service burden will peak at 13.2 percent of GDP in 2027 before declining to an average of 11.3 percent of GDP per year during 2030-34. In terms of exports of goods and services, total external debt service would peak at 48.6 percent in 2027 and decline to an average of 42.5 percent per year during 2030-34 (Table 3). The ratio of external debt service to exports of goods and services is somewhat above the median for other recent GRA exceptional access cases (Figure 1). Debt service due to the Fund in 2024-34 would average 1.0 percent of GDP per year, peaking in 2027 at 1.4 percent of GDP.

Financial Implications of the Proposed Arrangement for the Fund

9. The IMF’s credit outstanding to Ecuador at end-April 2024 was SDR 5.8 billion (835 percent of quota). This exposure originates from purchases of SDR 1.0 billion under the 2019 EFF arrangement, SDR 469.7 million under the 2020 RFI, and SDR 4.6 billion under the 2020 EFF.3 After the scheduled purchase upon approval of the proposed arrangement, Ecuador’s debt outstanding to the IMF would increase to SDR 6.5 billion (935 percent of quota) by end-May 2024. Repurchases under the 2020 EFF arrangement begin in the first half of 2025, while repurchases under the proposed EFF arrangement would begin in 2028. Total scheduled Fund repurchases amount to SDR 306 million in the remainder of 2024, SDR 759 million in 2025 and SDR 796 million in 2026.

10. The proposed EFF arrangement would increase the Fund’s exposure to Ecuador.

  • After the scheduled purchase upon the approval of the arrangement, Ecuador would remain the Fund’s fourth largest GRA borrower, with credit outstanding that would account for 7.1 percent of total Fund credit (Figure 6).

  • Credit concentration measured by the Fund’s exposure to the top five borrowers would increase slightly from 70.0 percent to 70.2 percent following the purchase upon approval of the proposed arrangement (Table 4).

  • The Fund’s current level of precautionary balances (PB) would continue to comfortably exceed the credit exposure to Ecuador. Fund GRA exposure to Ecuador after the purchase upon approval of the proposed arrangement would be modest and amount to 26.8 percent of PBs (Table 4), rising to 28.5 percent when credit to Ecuador peaks (assuming the level of precautionary balances at end-January 2024, which is slightly below the medium-term PB target of SDR 25 billion).

11. Although Ecuador’s access in terms of quota under the proposed EFF would be modest relative to other EA cases, the Fund’s total exposure to Ecuador would peak at 1,002 percent of quota in November 2025, similar to the median of comparators. At 430 percent of quota, Ecuador’s access under the proposed EFF would be below the median access for other GRA exceptional access arrangements since 2008 (700 percent of quota; Figure 2). However, since Ecuador’s debt outstanding stands already at 835 percent of quota (see A9), the Fund’s exposure to Ecuador would increase to 935 percent of quota after the purchase upon approval of the proposed EFF and peak at 1,002 percent of quota in November 2025 assuming all purchases and repurchases are done according to schedule. This peak would be in line with the median peak for comparators since 2008 and above the peak for Ecuador's 2020 EFF (874 percent; Figure 4).

12. Ecuador’s capacity to repay the Fund is subject to significant risks and depends on full program implementation and timely external financing. Ecuador's peak Fund exposure and peak payments obligations metrics compared to other GRA exceptional access cases are mixed (Figure 5). Ecuador's peak Fund exposure in terms of gross international reserves is the highest of comparator cases—only below that of Ecuador at the time of the approval of the 2020 EFF. Peak Fund exposure in terms of total external debt is also above the median of comparators, while the peak in terms of GDP is slightly below the median. With regards to peak payments obligations, debt service to the Fund in percent of exports of goods and services and in percent of total external debt service is below the median of other GRA exceptional access cases.

13. The proposed EFF arrangement would have a modest impact on the Fund’s liquidity position. The Fund's Forward Commitment Capacity (FCC), which stood at SDR 163.9 billion as of April 24, 2024, would fall by 1.8 percent following the approval of the proposed EFF arrangement (Table 4).

14. Income risks would be moderate. Fund income from Ecuador is projected to account for about 17 percent of total lending income in FY2025, based on a desk survey scenario for projected program demand as of February 2024. If Ecuador were to accrue arrears on charges and surcharges in FY25, the Fund's burden sharing mechanism would be sufficient to cover such arrears. Total GRA charges and surcharges for Ecuador for FY25 are SDR 454 million, accounting for 34.5 percent of the Fund's current residual burden-sharing capacity of SDR 1.32 billion (as of April 24, 2024).

Assessment

15. The proposed EFF arrangement would help Ecuador face its pressing balance of payments needs. In the context of a full dollarization regime, Ecuador is facing balance of payments needs driven by weak fiscal balances—including due to the decline in oil exports and subsequent contraction in net oil receipts—and pressures on the financial account due to capital outflows, large external debt obligations and lack of market access. After factoring in fiscal consolidation under the program and support from other international financial institutions and official bilateral creditors, the country faces an estimated financing gap of US$4 billion in 2024-2028. The proposed arrangement will aim to strengthen fiscal sustainability and rebuild liquidity buffers, safeguard dollarization and macroeconomic stability, and advance the structural reform agenda to promote sustainable and inclusive growth.

16. Ecuador’s capacity to repay the Fund is subject to significant risks. Key downside risks include a further deterioration in the security situation that would impact investment, tourism, economic activity, the fiscal accounts, and the financial sector. Political fragmentation could delay reform implementation and lead to additional liquidity pressures. Unexpected declines in oil prices or disruptions to oil production that reduce oil revenue would also affect the country's capacity to repay. Finally, tighter financing conditions could affect Ecuador's ability to re-access the market in 2025 as envisaged. Upside risks include stronger-than-expected global growth and higher oil prices.

17. The proposed arrangement would have a modest impact on the Fund’s liquidity position, while the Fund’s credit exposure to Ecuador would increase further. The Fund's FCC would fall by 1.8 percent following the approval of the proposed EFF arrangement. After the purchase upon approval of the EFF, Ecuador would remain the fourth largest GRA borrower and will account for 7.1 percent of total GRA Fund credit outstanding. Assuming all proposed purchases are made according to schedule, Ecuador's GRA debt outstanding would peak slightly above 1,000 percent of quota in November 2025.

18. Full program implementation would be critical to mitigate financial risks to the Fund. Ecuador's capacity to repay the Fund depends critically on steadfast program implementation and timely external financing as the country has run out of liquidity buffers. Credible reform implementation is also key to regaining access to private international bond markets and mobilize resources from other official creditors. Despite the authorities' strong ownership, risks to policy implementation are high stemming from a fragmented National Assembly and forthcoming general elections in early 2025. If policy slippages—or reversals—were to materialize, the risks of arrears to the Fund would not be insignificant given Ecuador's large repurchases scheduled for the next five years.

Table 1.

Ecuador: Proposed Access and Phasing Under the Extended Fund Facility

article image
Source: IMF staff estimates.
Table 2.

Ecuador: IMF Financial Arrangements and Fund Exposure, 1988-2038

(In millions of SDR)

article image
Source: Finance Department.1/ As of end-December, unless otherwise stated.2/ Fund exposure in 1988 included outstanding credit from arrangements prior to 1988.3/ Figures including transactions under the proposed program are in italics. Fund exposure is derived assuming purchases and disbursements are made as per the schedule in Table 1 and Ecuador remains current on all its scheduled repurchases and repayments.
Table 3.

Ecuador: Capacity to Repay Indicators1//

article image
Source: Ecuadorian authorities, Finance Department, and IMF staff estimates.1/ Assumes full drawings. Indicators based on the baseline macroeconomic scenario presented in the staff report.
Table 4.

Ecuador: Impact on GRA Finances

(In millions of SDRs unless otherwise noted)

article image
Sources: Finance Department, and IMF staff estimates.1/ The FCC is defined as the Fund's stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include resources under the New Arrangements to Borrow or the Bilateral Borrowings Agreements.2/ A single country's negative impact on the FCC is defined as the country's sum of Fund credit and undrawn commitments minus repurchases one-year forward.3/ Projected credit outstanding for Ecuador at time of approval of the proposed arrangement, which includes the scheduled first purchase.4/ Burden-sharing capacity is calculated based on the floor for remuneration which, under current policies, is 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges.
Figure 1.
Figure 1.

Debt Ratios for Exceptional Access Arrangements1/ 2/

Citation: IMF Staff Country Reports 2024, 146; 10.5089/9798400277542.002.A002

Source: Ecuadorian authorities and IMF staff estimates.1/ Estimates as reported in relevant staff reports on the request or augmentation of SBAs or EFF arrangements approved since September 2008. For Ecuador, ratios reflect end-2023 data.2/ Asterisks indicate PRGT-eligible countries at the time of the program.
Figure 2.
Figure 2.

Approved GRA Exceptional Access Cases Since September 20081/

Citation: IMF Staff Country Reports 2024, 146; 10.5089/9798400277542.002.A002

Source: Finance Department and IMF staff estimates.1/ FCL arrangements as well as arrangements with relatively low access in SDRs are not included.
Figure 3.
Figure 3.

Projected Credit Outstanding Path Under Existing Arrangements and Proposed EFF

Citation: IMF Staff Country Reports 2024, 146; 10.5089/9798400277542.002.A002

Source: Finance Department and IMF staff estimates.
Figure 4.
Figure 4.

Credit Outstanding in the GRA Around Peak Borrowing1/ 2/

(In Percent of Quota)

Citation: IMF Staff Country Reports 2024, 146; 10.5089/9798400277542.002.A002

Source: Finance Department and IMF staff estimates.1/ Peak borrowing “t” is defined as the highest level of credit outstanding for a member. Repurchases and repayments are assumed to be on an obligations basis.2/ Based on quotas at the time of approval, i.e., pre-14th General Review of Quotas for all countries except Argentina, Ecuador, Egypt, and Kenya. Median credit outstanding at peak is 1,002 percent of quota; average is 1,369 percent of quota.
Figure 5.
Figure 5.

Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases1/ 2/

Citation: IMF Staff Country Reports 2024, 146; 10.5089/9798400277542.002.A002

Source: Ecuadorian authorities, Finance Department, and IMF staff estimates.1/ Estimates as reported in relevant staff reports on the request or augmentation of SBAs or EFF arrangements approved since September 2008.2/ Asterisks indicate PRGT-eligible countries at the time of the program.3/ Excluding arrangements with members belonging to the euro area at the time of the approval of the arrangement: Greece, Ireland, and Portugal.4/ For arrangements of which total external debt (or debt service) ratio is not available, public external debt ratio is shown instead.
Figure 6.
Figure 6.

Credit Concentration of Fund GRA Exposure1/

(As a percentage of total credit outstanding)

Citation: IMF Staff Country Reports 2024, 146; 10.5089/9798400277542.002.A002

Source: Finance Department.1/ Total credit outstanding refers to credit outstanding as of April 24, 2024, plus Ecuador’s first purchase under the proposed EFF arrangement.
1

See paragraph 5 of Decision No 14064-(O8/18), adopted 2/22/2008, as amended, and The Acting Chair's Summing Up of the Review of Access Policy Under the Credit Tranches and the Extended Fund Facility, and Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy (3/5/03).

2

See the Sovereign Risk and Debt Sustainability Framework (SRDSF) included in this staff report.

3

Through end-April 2024, repurchases from the 2019 EFF and 2020 RFI totaled SDR 269 million.

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Ecuador: Request for an Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for Ecuador
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2024: Issue 146
Publisher:
International Monetary Fund
ISBN:
9798400277542
ISSN:
1934-7685
Pages:
122
DOI:
https://doi.org/10.5089/9798400277542.002
  • View in gallery

    Debt Ratios for Exceptional Access Arrangements1/ 2/

  • View in gallery

    Approved GRA Exceptional Access Cases Since September 20081/

  • View in gallery

    Projected Credit Outstanding Path Under Existing Arrangements and Proposed EFF

  • View in gallery

    Credit Outstanding in the GRA Around Peak Borrowing1/ 2/

    (In Percent of Quota)

  • View in gallery

    Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases1/ 2/

  • View in gallery

    Credit Concentration of Fund GRA Exposure1/

    (As a percentage of total credit outstanding)

Debt Ratios for Exceptional Access Arrangements1/ 2/

Approved GRA Exceptional Access Cases Since September 20081/

Projected Credit Outstanding Path Under Existing Arrangements and Proposed EFF

Credit Outstanding in the GRA Around Peak Borrowing1/ 2/

(In Percent of Quota)

Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases1/ 2/

Credit Concentration of Fund GRA Exposure1/

(As a percentage of total credit outstanding)