Deposits grow less and the little internal liquidity is diverted to cover part of the higher public spending, instead of becoming more credit for the productive sector.
The blood in the veins of any productive economy is credit. But the level of credit depends on savings and internal liquidity; in addition to external sources of financing.
In the case of Ecuador, for more than two years, the private financial system has lent at a faster rate than deposits grow; but this reality is changing strongly this 2023.
“The liquidity surpluses that existed, and that accumulated during the pandemic, have already been used to grant credit. So the credit granting limit has been reached, but there is a demand for financing”, explained Alberto Acosta Burneo, economist and editor of Análisis Semanal.
In this scenario, the first losers have been and will continue to be the companies. Corporate and business credit are declining because there is not enough internal liquidity to lend and external funding is out of reach, with a country risk of more than 1,800 points.
That lack of liquidity has caused maximum interest rates to rise. At the beginning of this 2023, the maximum interest rate for corporate credit rose by 43 points to 9.29%, and, in the case of business credit, the rise has been 47 points to 10.36%.
Andrea Brito, economist and financial analyst, commented that the financial system has had to raise the interest rate paid for term deposits, with the aim of attracting more money from citizens.
This makes internal funding more expensive; but on the other side, the policy of maximum interest rate ceilings for loans only allows them to adjust up to a certain point to cover the increased costs.
“The end result is that there is less to lend, especially in corporate and business financing, which is the one with the lowest maximum ceilings. There is still room for maneuver in consumer loans that have a higher maximum rate, which exceeds 16% per year, ”he said.
The final result is companies with less capacity to invest, expand operations, hire more staff, among others.
Thus, investment banks such as Fitch have already calculated downward the economic growth of Ecuador for 2023. Despite the optimism of the Minister of Economy, Pablo Arosemena, who assures that it will grow at 3.1%, this international bank suggests that It will not be greater than 1.6% of the Gross Domestic Product (GDP).
adverse scenario
The problems of lack of liquidity already began to be felt in June 2022; but this 2023 they are aggravated because the Government enters into the competition to raise financing in the external market.
Given the greater commitments of public spending, and the additional resources needed to face the ravages of the rains and the earthquake, the government needs more money than budgeted.
Multilateral organizations can lend up to a limit and the high international interest rates, together with the high country risk, make it impossible to finance itself through the issuance of bonds or other types of credit.
So, in the face of a shortage of at least $1,000 millionAcosta Burneo stressed that the Government has no other option than to “replace external financing with local bankswhich will increase competition for domestic savings and further push interest rates up.”
In other words, the greatest public spending will be financed by taking away credit space, especially from companies. In lieu of corporate and business loans, part of the liquidity of the private financial system will go to invest in public debt bonds.
Acosta Burneo added that there are not only more expenses, but also less public income. In January and February 2023, budget revenues fell -12.9%: -40% for oil tankers due to lower crude oil prices and less production) and -1.9% in tax revenues. (JS)
Armored from the external banking crisis
There are few channels for integrating the local financial system with the international one. This shields the country from any type of contagion from the international banking crisis.
85% of the liabilities of the Ecuadorian financial system are obligations with the public. In other words, more than 8 out of every 10 dollars of funding come from deposits in the domestic market.
For its part, only 14% of the available funds come from abroad.
Besides, dollarization forces to be prudent and have liquidity extra (there is no lender of last resort).
Thus, although the banks have used part of their reserves to give more credit, this strategy has a limit and a contradictory situation occurs: the Ecuadorian financial system is solvent and shielded against external turbulence; but it has a narrow field to raise more resources to lend to the real economy.
For this reason, Andrés Izurieta, an economist, pointed out that reforms are needed to internationalize the Ecuadorian financial system, without neglecting reserve policies and solvency management.
This is important because savings and investment from abroad must be attracted to inject liquidity into the domestic market.
Liquidity, or more accurately the lack of it, is one of the main reasons why companies go bankrupt or remain at micro levels with no capacity for growth.
