Ecuador’s recent turn toward more market friendly economic policies has lifted investor sentiment toward the Andean country, but follow-through beyond fiscal discipline will be key in order for the positive market reaction to continue, investors and analysts said.
Ecuador’s stock market, with a near 10% gain, has outperformed most of its larger South American neighbors so far in 2018. Its benchmark 2026 sovereign bond yield, recently above 11.5%, has fallen by more than 160 basis points over the last month to 9.8%, Reuters reported.
Part of the upbeat market sentiment can be traced to May, when social democrat President Lenin Moreno named an economy minister from within the business community.
Richard Martinez arrived with a plan to reduce external debt and the fiscal deficit. He has reached out to multilateral financing organizations and has driven negotiations over legislation that would allow 8-to-12 years of income tax exemption for new private investment over the next two years.
“This incentive would allow to accelerate both local and foreign private investment and foster growth,” said the Ecuadorian economy and finance ministry in an emailed reply to Reuters.
With Ecuador’s currency pegged to the US dollar, the country has effectively sacrificed an independent monetary policy, putting an even sharper focus on fiscal policy. The fiscal consolidation plan has pleased investors according to Giulia Pellegrini, deputy head of emerging markets economic research for BlackRock in London.
Preliminary data for the first six months of 2018 show a “significant fiscal tightening”, both from a reduction in new spending and from lower costs in recurring spending, she said.
“The government has shown that it means business in the first half of the year,” Pellegrini said. “We have good signs but we really want to see them complete this process.”
A reform of the mining code would also be important, analysts said, if the government expects the private sector investment to fill the void left by the government’s belt tightening.
“It’s a two-fold issue. It’s not only trying to correct the fiscal imbalance that they have but also trying to incentivize investment so that the economy becomes less reliant on government spending for growth, which had been the case over the past decade,” said Renzo Merino, an analyst of sovereign risk at Moody’s Investors Service in New York.
