Ecuador teeters on the edge amid public health crisis

Ecuador teeters on the edge amid public health crisis  Santa Ana Hill in Guayaquil (Credit: Shutterstock.com/Jess Kraft)

Ecuador is one of covid-19’s worst-hit countries in Latin America. Before the pandemic, it was already expecting a difficult 2020, but the coronavirus has further worsened that forecast and a foreign debt crisis is now looming large.

The country’s commercial hub – the port city of Guayaquil, with a population of some three million – is thought to be the region’s most affected city. While official figures for nationwide deaths remain below 600, independently gathered figures from cemeteries suggest that more than 8,000 people have succumbed to the pandemic in Guayaquil alone.    

Government and society are doing their utmost to fight the pandemic, but the country is in a financially delicate position to tackle the disease. “Ecuador had a difficult fiscal situation even before the covid-19 outbreak and was already in deficit. The economy grew less than 1% in 2018 and 2019 and the effect of the covid-19 outbreak has worsened the economic situation,” says CorralRosales partner Xavier Rosales.

The IMF is predicting an economic contraction of more than 6% in 2020, one of the sharpest declines in South America.

Government response

Lawyers are critical of the government’s ability to react against what may be a severe recession. Jorge Paz, partner of Paz Horowitz Abogados, says the government’s economic policies have been slow and too cautious to meet the private sector’s needs. “Actions have not been coordinated between different institutions and are not solving urgent issues,” he says. “Required changes to improve labour relationships and to avoid companies going into severe crisis have not been implemented.”

Paz acknowledges that the government has insufficient congressional support to make necessary changes to tackle the crisis, meaning it lacks a strong decision-making position. This view is echoed by Rosales: “neither the population, the unions and the opposing parties have collaborated for such changes.” This situation is not new; for example, back in October when the government eliminated fuel subsidies the proposal sparked violent protests, leading to arrests and deaths and threatening the government’s continuity.

The government sent a draft bill to the national assembly in mid-April. The humanitarian support law outlines financial aid for individuals and companies, prohibits the eviction of tenants from properties while the public health crisis is ongoing, details special funding to reactivate the economy, and contains labour measures, including a provision that would allow employers to reduce hours.

While Paz believes the government’s proposed plan is good, he is worried it will be too late to save businesses that have been bleeding cash for too long. “The implementation is yet to be seen and it may be too late for certain high-cost activities,” he comments.

Complicating matters further, the price of oil has plunged dramatically in recent weeks, a result of a price war between Russia and Saudi Arabia and the global economy’s slowdown because of covid-19. On top of that, two oil pipelines in Ecuador’s Amazon region burst earlier this month following a landslide.

The government’s income relies in large part on oil, with the country producing some 530,000 barrels per day. Instability in foreign markets, including China, which is an important trading partner for Ecuador, has also reduced income from exports, points out Pérez Bustamante & Ponce partner Diego Pérez Ordóñez.

Debt to be paid

With a cash-strapped government having to manoeuvre the current critical situation, lawyers are not excluding the possibility of a sovereign debt crisis. The government recently repaid US$325 million of debt that was maturing in March. It also reached an agreement with a group of bondholders to delay payments worth US$811 million that were due in April for four months, pushing back a potential default to at least August. “The US$325 million principal payment made it possible to reach a deal to delay interest payments through to August,” says Bustamante & Bustamante partner José Rafael Bustamante Espinosa. But there is still “a risk of possible default,” he says, highlighting that the pandemic has hit at the worst possible time.

Jorge Paz says the government’s current strategy appears to be to pay the principal amount due on foreign debt, while trying to renegotiate interest payments. The government informed creditors earlier in April that the country needs liquidity relief because debt service costs could consume 31% of fiscal revenues in 2020.

The government’s open communication with creditors and bondholders will help Ecuador reach a favourable debt restructuring agreement, says Rosales. He recalls the country’s default in 2008, which he says “strongly damaged” Ecuador. To avoid that the country must rely on creditors being flexible in the renegotiations, he says.

In a recent interview published by Latin Lawyer, Quinn Emanuel Urquhart & Sullivan LLP sovereign litigation partner Dennis Hranitzky said that while investors obviously want to maximise their returns, they are also respectful of the fact that countries like Ecuador also have to address the current public health crisis.

To stabilise its financial situation, Ecuador is currently in talks with the IMF about a new financing deal. Ecuador obtained a US$4.2 billion loan from the IMF last year. The financial institution announced earlier this month it has doubled its emergency lending capacity to US$100 billion due to the covid-19 crisis.    

Business as usual?

The government is not only lacking cash to handle its debt burden, but also to support Ecuadorian businesses, of which most have been forced to close due to lockdown measures. Unlike other Latin American countries, Ecuador has so far not implemented corporate tax reliefs, other than extending deadlines for tax payments. “With the very serious fiscal situation the government is facing it is unrealistic to expect any tax reliefs,” Rosales says, while pointing out that Ecuador does not possess the necessary international reserves to spend in times of crisis, as some of its neighbouring counties do. Additionally, Ecuador’s dollarised economy prevents it from using exchange rates as a tool for financial flexibility.

Although tax reliefs have not been implemented, Bustamante says tax advice is one of the most sought after areas from clients right now. “Clients are looking for mechanisms to reduce their tax burden”.

Another busy practice is labour. To save money, companies are seeking lawyers’ advice to lay off employees, alter labour contracts and reduce working hours. Lawyers have long argued for labour reform, to unknot Ecuador’s rigid labour market. Currently, a clause in the labour code allows companies to dismiss workers based on force majeure and without providing severance payments. “There is a lot of debate on how to interpret this provision in the labour code,” says Bustamante.

Despite facing public health, financial and debt crises simultaneously, lawyers think now may be the time for the government to address certain long-standing issues they think are holding the country back. “The government should take a decisive approach to the crisis that comes together with collecting additional taxes, reducing the size of government, and implementing modern and flexible employment rules,” says Rosales. By divesting infrastructure assets through public-private partnerships and similar agreements the government could help to resolve the crisis, he points out.