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Tuesday, November 17, 2009

Ecuador's 2010 Budget Plan Raises Fiscal Stability Doubts

Dow Jones 9 Nov 2009 --Ecuador's proposed budget for 2010 is raising concerns over its medium-term fiscal outlook and external debt repayments.

Jaime Carrera, secretary of the Fiscal Policy Observatory think-tank, described the 2010 budget as "populist" and "destructive."

"The spending increases are not sustainable," he said. The result, Carrera said, could be internal social problems, and potential non-fulfillment of external debt payments.

Last week Ecuador's government submitted budget proposals to the National Assembly worth $21.28 billion for 2010, an 11% increase on the 2009 budget proposal of $19.17 billion.

The 2010 budget proposal forecasts a 6.81% increase in gross domestic product, including 7.67% growth in the non-oil sector and 1.3% growth in the oil industry.

The government has established an average price assumption for crude oil of $65.9 per barrel, with production forecast at 178.4 million barrels.

A former member of Ecuador's Central Bank board, Marcos Lopez, told Dow Jones Newswires Ecuador lacks an economic plan. "There is an ideological-political model," Lopez said, which is based on the government's desire for "political effects and popularity."

According to Lopez, the 2010 budget will mean a deficit of at least $4 billion, because revenue forecasts are too optimistic.

Government revenue expectations in the 2010 budget proposal are $13.84 billion - $8.16 billion of which should come from taxes and $3.21 billion from oil-related activities. An estimated $5.84 billion will be needed simply to cover salaries for the public sector in 2010.

Mauricio Pozo, a former Economy Minister, said it is impossible for Ecuador to increase its tax collections when it is in recession.

Ecuador expects to receive external financing of about $2.18 billion and internal financing of $1.9 billion in 2010.

Last month, President Rafael Correa announced his government will repatriate around $2.5 billion from the nation's international reserves. The money, Correa said, will be used to generate local employment and reactivate the economy, which contracted 0.26% in the second quarter and 1.62% in the first quarter this year.

Economists say the use of international reserves is a sign of the current lack of liquidity.

Another problem is the government's high subsidy levels. A study from the Fiscal Policy Observatory estimates subsidies cost $4.0 billion in 2009. For 2010 that will increase to an estimated $5.0 billion.

"There's going to come a moment where revenues can't cover the fixed costs," said Carrera. Lopez said the budget was a time bomb, with high social costs that will lead to economic problems and social conflicts.

-By Mercedes Alvaro, Dow Jones Newswires

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