Ecuador’s Banking Industry Faces Challenges in Wake of Presidential Election

The country’s banks are preparing for a potentially difficult period ahead as newly elected President Daniel Noboa takes office amidst a backdrop of economic instability and financing risks.

Economic Instability and Financing Risks

According to Fitch Ratings, Ecuadorian banks’ fortunes are tied to the country’s overall liquidity situation, which is facing significant challenges. The ratings agency downgraded Ecuador’s sovereign rating in August due to concerns over high political instability, locally and externally, and difficulties in accessing financing.

Fiscal Accounts Deteriorating

Larisa Arteaga, director for Latin America financial institutions at Fitch Ratings, notes that while Noboa’s business background may offer a positive outlook for the banking sector in the short term, the country’s fiscal accounts are deteriorating. The central government’s fiscal deficit is forecast to rise to 3.2% of GDP this year, impacted by lower oil prices and higher spending.

Systemic Liquidity Risks

Ecuador’s economy has been officially dollarised since 2000, which means that systemic liquidity risks are high due to the limited capacity of the central bank to provide liquidity. The International Monetary Fund (IMF) warns that interbank funding markets are thin and that the central bank does not offer liquidity facilities.

Mitigating Risks

To mitigate these risks, sound liquidity requirements, easing impediments to banks’ investments in global liquid assets, and further development of the interbank and securities markets are essential steps. However, Arteaga notes that there is lower liquidity at the banking system level recently, also due to very slow deposit growth.

Implementing Basel III Liquidity Ratios

In a bid to adapt to global standards, Ecuador’s banks will implement Basel III liquidity ratios in November. But they will need time to adjust, Arteaga notes.

Credit Growth and Interest Rates

The focus on consumer loans as a way to compensate for lower net interest margins is another key trend in the country’s banking sector. Credit for consumption can reach interest rates of 16.77%, while corporate loans are capped at around 10%. However, despite lower interest margins, banks have accumulated lots of reserves during the pandemic and have high provision levels.

Macroeconomic Risks

As a result, credit growth has slowed, with credit growth standing at 7% as of September 2023 compared to 11.8% for the same month in 2022. Macroeconomic risks also need to be taken into account, including further tightening of US monetary policy, an abrupt slowdown in China, and falling oil prices, which could reduce economic activity and impact both asset quality and liquidity of the banking system.