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Fitch: Tax reform relaxes, but does not remove, Ecuador's financing woes

Fitch Ratings said it expects Ecuador's recently approved tax reform to buoy the country's financing outlook as it provides support to its extended fund facility with the International Monetary Fund, although risks still remain due to an extended social and political backlash that has weighed on a swift fiscal adjustment laid out on the EFF.

The tax reform, which was approved by the country's National Assembly on Dec. 9, is expected to generate $600 million through taxes on large companies and digital platforms. However, the passing of the reform had faced several roadblocks, reflecting political factors that are taking a toll on authorities' ability to make policy changes, Fitch said.

For one, the tax reform was diluted and will only contribute modestly in the EFF target fiscal adjustment of $2.0 billion, or 2% of GDP, for 2020, Fitch said. Negotiations with social groups for planned fuel subsidy cuts have also not progressed, making additional measures to address the target gap unlikely, the rating agency said.

Fitch expects Ecuador's central government deficit to rise to 5.1% of GDP in 2019 before falling to 3.2% next year. The rating agency also forecasts a 0.3% economic contraction this year due to the social unrest, before modestly recovering to a 0.4% growth in 2020.

"Difficulty in realizing asset sales, spending pressures, and weak growth pose fiscal risks," Fitch noted.

The passing of the reform will still provide backing for the $4.2 billion EFF, with the possibility of another round of disbursements for $500 million from the IMF.

Despite continued support from the IMF, Fitch believes Ecuador faces a tough financing scenario, given $8 billion in financing needs and a $3.5 billion gap in 2020. "The sovereign's ability to fill this gap remains subject to risk," the rating agency noted.