Ecuador Is Nearly Bankrupt

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GCaM Greater Caribbean Monitor
March 08, 2024

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We welcome you to the Greater Caribbean Monitor (GCaM). In this issue, you will find:

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•Ecuador Is Nearly Bankrupt

•Trump Is Running

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•Ecuador Is Nearly Bankrupt
625 words | 3 minutes reading time

Daniel Noboa took office as president of Ecuador on November 23. By January, he had been compelled to declare a state of emergency, stating that the country was experiencing an “internal armed conflict.” The war Noboa is now waging against cartels and criminal gangs has run into a considerable problem: an empty treasury.

  • The first days of January were trying ones for Ecuador. The prison run of José Macias Villamar, better known as “Fito,” the leader of the Los Choneros criminal gang, led Noboa to declare a state of emergency.

  • Criminal gangs, deeply involved in cocaine trafficking, responded with enormous prison riots. They also broke into the headquarters of the state broadcaster, TC Televisión, and tried to take over the University of Guayaquil.

  • Noboa’s response was forthcoming. From January 9 to February 27, some 130,000 anti-terrorism operations were carried out, leading to the arrest of 10,569 people. The majority have not been charged—yet—with terrorism.

Data. The country’s financial situation remains grim, but it was far worse in January. Ecuador welcomed 2024 with $138 million in the Treasury’s account; on the same date in 2023, it had $1,088 billion to its name. Two months ago, in any case, a primary deficit of around $5 billion was expected; counting debt service costs, the figure would be closer to $10 billion.

  • The big culprit is bureaucracy, whose costs amounted to $10.13 billion in 2023. Almost the entire government budget is spent on payroll and the major entitlement programs. In 2022, the state barely allocated $677 million to its Annual Investment Plan.

  • Noboa has sought to remedy the situation via tax reforms. His Economic Efficiency Law promises to generate some $832 million in additional revenues this year. Furthermore, his government has asked large firms to pay 50% of their taxes in advance, mostly to pay pending salaries.

  • But the most notable reform was the increase in VAT from 12% to 15%. The measure, which will come into force on April 1, has been explicitly defended as a way to “confront the internal armed conflict.”

Between the Lines. Ecuador is a country of generous subsidies, which have an annual cost of $7.463 billion. The previous president, Guillermo Lasso, tried to cut them, provoking huge protests. The opposition threatened to impeach him, to which Lasso responded by triggering a constitutional mechanism known as “mutual death” and calling for early elections.

  • Noboa, who was merely elected to complete the remainder of Lasso’s term, faces the prospect of elections in February 2025. He thus lacks the political capital to impose strong austerity measures.

  • The IMF could be the country’s salvation. Two possible loans are being negotiated, one for $3 billion and the other, known as the Resilience and Sustainability Facility (RSF), for about $1 billion. While in New York last week, Noboa spoke of a deal being closed within two months.

  • Ecuador also reserves the right to appeal to other multilateral banks, which in recent years have reduced their disbursements to the country. Private investors are reluctant; the country’s debt is trading at 63.7 cents on the dollar; the market estimates the default risk at 80%.

Future. That said, Noboa is extraordinarily popular: a February 29 recent poll placed his approval rating at around 81.4%. Around 53% of voters affirm that they would vote “yes” in the popular consultation called by Noboa, which will take place on April 21.

  • If the consultation is approved, the Army, and not just the Police, would patrol the streets; the extradition of Ecuadorians would be allowed; and penalties for terrorism and drug trafficking crimes would be increased.

  • Noboa has been in power for just over three months. He is not responsible for the Ecuadorian debacle, largely attributable to correísmo, which inflated the size of the bureaucracy and was reluctant to combat the criminal gangs that were gradually acquiring power and links with drug traffickers Mexico, Colombia, and Peru.

  • For now, voters trust him. He has been a bold politician, forming alliances with both the correístas and the conservative Christian Social Party, but it remains to be seen whether he will be able to finance the state response to the internal armed conflict.

What We’re Watching

El Salvador’s agreement with the IMF faces uncertainty: Barclays [link]

Irma Cantizano, La Prensa Gráfica

Barclays points out that aside from an agreement with the IMF, El Salvador has few credit alternatives. If an agreement is reached with the IMF, El Salvador would immediately unlock financing from the World Bank and other multilateral banks. More than three decades had passed since the Central American country had requested a loan from the IMF. The last one was a $389 million loan to combat the pandemic. The Salvadoran treasury has said that it will pay back a large portion of this credit—$206.3 million—this year, but even so, the country’s public debt will continue growing until 2025. El Salvador, it should be recalled, has a debt-to-GDP ratio of around 80.9%, the highest in Central America.

First Quantum’s Panama mine closure to cost around $800 mln, minister says [link]

Reuters

Shutting down the Cobre Panamá mine will cost about $800 million, but it is not entirely clear who will have to pay the bill for it. The Panamanian state says it is looking for alternative sources of financing and suggests that First Quantum Minerals, the mine’s Toronto-headquartered operator, will have to bear the brunt. In any case, Panama would have a hard time paying: the mine represented 5% of its GDP and 75% of its goods exports; its closure will inflict long-term losses in terms of economic growth.

Dominican Republic maintains “strict” measures on the border due to the situation in Haiti [link]

Infobae

Due to chronic violence and an enormous prison run in Haiti, the Dominican defense ministry is maintaining very strict controls at all border crossings. According to reports from the International Crisis Group, 80% of the Haitian capital, Port-au-Prince, is controlled by criminal gangs that carry out armed attacks, murders, kidnappings, and rapes. It is estimated that approximately 4,000 inmates escaped after criminal gangs invaded the prisons and then released their prisoners. Given the situation, the country has declared a 72-hour state of emergency and a nighttime curfew. The prime minister (and also acting president), Ariel Henry, has not been able to return to the country after a diplomatic tour; Washington has urged him to resign, pursuant to an agreement that should have seen him leave office on February 7.

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•Trump Is Running
613 words | 3 minutes reading time

In Trump v. Anderson, the U.S. Supreme Court unanimously ruled that states lack the power to determine who can run for federal office. Therefore, no state will be able to deny former president Donald Trump a spot on their ballots.

  • In December, the Colorado Supreme Court ruled against Trump, arguing that his alleged association with the January 6 assault on the Capitol served to disqualify him as a presidential candidate.

  • Two more states, Illinois and Maine, imitated Colorado’s ruling and excluded Trump from their elections. The U.S. Supreme Court ruling refers specifically to Colorado, but is binding on all states of the Union.

  • Even if Trump were linked to an insurrection, the Constitution gives Congress the power to lift any resulting disqualification. With this ruling, it is now precedent that only Congress has the power to impose, and not simply lift, a presidential disqualification.

Between the Lines. Trump is, for all intents and purposes, the Republican nominee ahead of the November 5 elections. Nikki Haley, his only opponent, has withdrawn, having only won the primaries in Washington, D.C., and Vermont, whose Republican voters are markedly different from those in the rest of the country.

  • The decision wouldn’t seem to matter much: Illinois and Colorado are solidly Democratic, while Maine, one of the few states that splits its Electoral College votes, has a very small population. However, it prevents more states from seeking to exclude Trump’s candidacy.

  • The ruling had immediate effect, allowing Trump to participate in the Colorado Republican primaries. No logistical problems ensued: Republican organizers were always confident of victory, and therefore, never removed Trump’s name from the ballots.

  • Trump does not yet have the requisite number of delegates to be formally enshrined as the Republican presidential nominee, but his candidacy is by now a foregone conclusion.

Capitol Hill. It’s been a busy few days for the Republican Party. A vacancy has opened with the announced retirement of Mitch McConnell, the Republican leader in the Senate. Beyond securing a victory from the U.S. Supreme Court, the party’s most conservative wing seeks to gain control of the Senate leadership.

  • McConnell represents the Republican old guard, more moderate and more inclined to negotiate with Democrats. He praised the border bill proposed by the White House, which established a limit of 5,000 migrants per day. Needless to say, the majority of his party opposed it, as Biden bemoaned during his State of the Union address.

  • All this dismays more conservative senators. Their faction longs for a structure more similar to that of the Republicans in the House of Representatives, who are much closer to Trump, especially on immigration issues.

  • Two successors to McConnell have emerged: Senators John Thune, of South Dakota, and John Cornyn, of Texas. Both are boasting of their conservative credentials, in order to seduce the most right-wing wing of the party, which will probably vote en bloc.

The Balance. Both the Supreme Court decision and the behind-the-scenes agreements in the Senate demonstrate Trump’s hold on the Republican Party. Despite facing countless legal suits against him, the former president will evidently lead his party into the presidential elections.

  • With eight months left before the elections, all national polls deem Trump the probable winner. A March 1 YouGov-CBS poll suggests 52% of voters would side with Trump. Similar margins are observed across the board.

  • Without assuming a Republican victory in November, Central America must be prepared. Trump would evidently seek to reduce immigration, which will likely be the defining issue of this presidential campaign.

  • Likewise, a Trump presidency could bring advantages. Under him, Washington would not only be more reluctant to accept immigrants, but would view growing Chinese influence in the region with greater suspicion. Republicans would be aware that there is only one way to compete: U.S. investments.