Ecuador: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: C
Risk Assessment2
Growth supported by public spending and loans from China
After a sharp economic downturn in 2009, the recovery in 2010 has been weak with growth well below the regional average. This is attributable to poor performance in the private oil sector and a low rate of domestic investment. The economy has benefited from a slight recovery in domestic demand buoyed by strong oil prices (up 25% on average compared to 2009) and from both public spending (despite delays in executing the budget) and the expansion of credit. There was no strong recovery in transfers from expatriate workers to boost private consumption due to the weakness of the Spanish economy, particularly in the construction sector, which employs many Ecuadoreans. Furthermore, the increase in imports undermined GDP growth.
High oil prices and new loans from China have supported increased in public spending. Growth is thus accelerating in 2011, driven by private consumption and public investment in infrastructure. Industrial and construction activity are expanding, along with water, electricity and gas sectors. Oil production is up slightly. But private investment, particularly foreign direct investment will continue to be held back by the increased economic nationalism and by the weakness in the legal and institutional environment. Moreover the country will continue to be cut off from financial markets as a consequence of its default on debt repayment in 2008. The economy is still very dependent on the oil sector and vulnerable to the volatility of raw material prices.
Precarious financial situation
With the rise of oil prices the public sector deficit will tend to narrow gradually through end 2011. The buy back of the debt on which Ecuador defaulted late 2008 and continuation of payments on the balance of the public sector foreign debt have improved the perception of sovereign default risk. But it nonetheless remains high in view of the country's great dependency on oil revenues, limited sources of financing, risky macro-economic policies, and still uncertain payment performance.
The country remains highly dependent on imports, and despite the rise in prices of raw materials exports, the current account should continue to run a deficit in 2011. External debt ratios are on the upside.
The upturn of oil prices in conjunction with the financial backing provided by regional multilateral institutions and friendly countries, particularly China, has mitigated the risk of a liquidity crisis. Fears of Ecuador withdrawing from the dollarization system have waned. In liquidity terms the situation has nonetheless remained precarious. As a result of the economic dollarization and the lack of a lender of last resort, the banks remain exposed to a shock.
Persistent political instability
President Correa rode a powerful wave of popularity after taking office in 2007. But the crisis has exacerbated the social unrest and political cleavages that have paralyzed his reform program based on greater state intervention. World Bank governance indicators place the country at a high level of risk.
Strengths
- Extensive mineral resources
- World-leading exporter of bananas and shrimp
- Dollarised economy
- Member of OPEC
Weaknesses
- Insufficiently diversified economy, exposed in particular to oil price fluctuations
- Inadequate infrastructure and underqualified workforce
- No access to international capital markets following “selective” default rating at end of 2008
- Deficient business environment and constraints on private sector activity
- Geographic disparities, strong social inequalities and tensions