People, enterprises, corporations, they all need money…we all need loans, we all need banking.
What do they need it for? Many answers to that, all of them well justified. But, how is the credit o loans system working in times of distress? If the payment system, because of inactivity due to force majeure is interrupted? Let us take the case of Ecuador.
Implemented by Government decree, starting on the 14th of March, all enterprises, SME’s, industries, convenience stores…everybody, closed business due to the sanitary emergency. There is a curfew in place, from 2 p.m. to 5 a.m everyday, in principle until the 5th of April. As a result, marginal commercial activities are taking place and in some cases nil.
First reaction of the productive and commercial sector is to ask for a waiver to pay taxes and contributions to employees social security, during the period of enforcement of the emergency. These has been approved as a deferral of the payments due in the months of March and April. Utility services (internet, electricity, water, telephone) are to continue to be provided, even if payment by the users is not received. Health providers are collapsed, as supply of food in supermarkets and popular markets. Gas stations have dropped sales in around 70%. Exports have dropped in some cases up to 70% (flowers) due to lack of available maritime transportation, among other causes. Air travel is nil. Petroleum prices have taken a free fall in the past 5 weeks from around $51/barrel to approx $21/barrel, a stunning -58% drop. Payroll has to be paid by the end of the month and we do not know when the workforce will be allowed to return to work given the emergency. The Bank regulator has instructed banks, that under their own risk they must not collect payments of loans due in March and April, as they must be postponed or restructured. The need of liquidity for everyday transactions will put pressure on deposit withdrawals as cash flow is depressed, savings are a first recourse or default of payments to providers or banks. No corporate bail out in the horizon, as government itself was coming from a economic distress and has asked for help from the IMF, World Bank, CAF, etc., as IMF who has delayed disbursements to Ecuador. Are you holding your breath ?
The COE (National Emergency Operations Committee) has estimated that Ecuador’s GDP will decrease -3% per month, should conditions remain the same. My gut feeling tells me this will go into July +. Then, recovery? Reconstruction? International markets severely affected, so limited international assistance should be expected. Ecuador has no money w capability, as we are a dollarized economy, as we forfeited our domestic currency, the Sucre, 20 years ago, thus monetary policy is not an option.
As will other countries, corporations, businesses in general, a new Ecuador has to be build, we have a paradigm shift, new business models for the private sector. Innovation under urge, technology and creativity as allies.
El Economista Digital 