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Ecuador Receives an IMF Loan

Author: Ian Davis - Bullion Manager

Published: 26 Feb 2019

Last Updated: 12 Mar 2019

The IMF steps in to help Ecuador who join Greece and Argentina as recent recipients of bailout funds. This is the third bailout within a decade and I wonder whether it is an indicator, or a marker at least, of increasing market complexity and increasing risk of a global downturn. Each situation is unique and the reasons behind such crises are complex but three in a decade seems high to me!

Ecuador has been burdened with the legacy of socialist policies from previous President Correa who was in office between 2007 and 2017. The current President Lenín Moreno claims the loan will save Ecuador from descending into chaos avoiding the fate of its neighbour Venezuela. The loan protects what is an important Opec economy, be it that they are low in the league table of oil production, but it goes a long way to stem the negative effects of left leaning policies by the former party. You may be aware of Correa as he hit the world stage offering Wikileaks founder Julian Assange political asylum and he gained notoriety by keeping close company with socialist regimes of the world, notably Venezuela and Cuba. One just has to look at the state of Venezuela with its uprisings, sanctions and mass scale emigration to see Moreno's action as justified.

Statista Data - Opec Producing Countries by Volume of Oil Produced

Towards the end of his political term Correa steered the Ecuador economy into recession due to heavy reliance on oil exports and oil backed debt mainly with China. When oil prices tanked around 2016 the economy suffered greatly, and as his popularity sank to record lows Moreno found his voice and his place in office.

Macrotrends – Oil Price in USD

Moreno has vouched a new approach to the economy embracing capitalism as the vehicle to a brighter future, a stark contrast to the previous decade, and one which is likely to put Ecuador in a better position. It is capitalism after all, with all its inherent failures, that has lifted more people out of poverty across the globe than any other societal mechanism. 

How he will pay off the oil backed loans from China with oil at a relatively low price and keep his country afloat will be a test of his premiership but at least for now this is one less country in South America to find itself in turmoil. Economic disaster can spread easily so if these steps protect (or even improve) the emerging markets of Mexico, Peru, Brazil, Colombia and Chile it can only be a good thing for the global economy which is already teetering on recession early in 2019.

You may wish to read more articles in our market news section. 

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