Ecuador: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant mineral, oil and gas potential
- Tourist potential (flora, fauna, heritage)
- Diverse climate allows for a wide range of crops
- Marine resources: number-one exporter of shrimp
- Low inflationary risk due to fully dollarized economy
- Oil-dependent economy
- Competitiveness subject to dollar movements due to fully dollarized economy
- Large informal sector and low-skilled workforce
- Legacy of sovereign default
- State interventionism
- Low levels of domestic and foreign private investment
Growth Remains Hobbled by the Decline in Public Support
Growth will continue to slow in 2019, held back by continued fiscal consolidation and persistently sluggish domestic demand. As financing conditions for the deficit grew tighter, the government was forced to draw up a fiscal consolidation plan in 2018 to reassure the markets. Under this plan, the government will slash investments and eliminate civil servant positions in 2019. In addition, interventionism and a lack of competitiveness (high cost of public services, rigid labor market), exacerbated in recent years by dollar appreciation, have lessened the draw for private investors.
Household consumption is expected to remain constrained by the weak growth in purchasing power linked to the wage freeze and the rise in the unemployment rate, which will nevertheless remain low. Moreover, with the informal sector accounting for 45% of employment, many households do not receive the minimum wage and full social benefits.
After a period of deflation due to the appreciation of the US dollar and the wage freeze, prices will rise slightly again in 2019, driven by reduced fuel subsidies and stabilization of the dollar. In addition, oil sales should benefit from firm prices, even if production is unchanged at Petroamazonas, the national company that accounts for 78% of national production. Conversely, cocoa producers will be hard hit by the entry into force of a European standard imposing a maximum content level for cadmium, a substance which is very present in local cocoa. Other agricultural products, including bananas, shrimp, canned fish and flowers, will be hurt by cooler European and North American markets. Manufacturing sectors will continue to be penalized by their lack of competitiveness outside the dollar zone. However, at the same time, imports will be sluggish, in line with domestic demand, allowing external trade to make a slightly positive contribution to growth.
Fiscal Consolidation to Control Soaring Debt
President Lenín Moreno has launched a fiscal consolidation plan that will generate estimated total savings of USD 1 billion, or 1% of GDP. The aim is to reduce the deficit sufficiently to contain the country’s debt, which has risen sharply since 2012, exceeding the statutory limit of 40% of GDP. Measures include the obligation to use tenders for public contracts (USD 400 million in savings), the phase-out of public jobs through mergers of state-owned entities (USD 350 million) and the removal of subsidies on premium gasoline (USD 150 million).
At the same time, the current account is expected to remain slightly in deficit. The trade balance will be impacted by expensive imports of petroleum products, due to insufficient refining capacities to meet growing domestic demand. The balance of services will also continue to show a small deficit, with freight and oil services paid abroad exceeding strong tourism revenues. In addition, growing debt interest and profit repatriation will exceed expatriate remittances from the United States and Spain. With weak FDI (0.6% of GDP in 2017) insufficient to cover the deficit, the government will have to resort to external debt, as in January 2018 (USD 3 billion). The authorities have limited room for maneuver, as reserves are very low (less than two months of imports in June 2018). However, the resumption of relations with the IMF since President Moreno came to power offers an additional option for lower-cost financing, at the cost of accelerated fiscal consolidation.
The President's Popularity Wanes Despite a Successful Referendum
President Moreno emerged stronger from the February 2018 referendum in the struggle with his predecessor Rafael Correa for control of their party, Allianza Pais (AP). An average of 68% of voters in the referendum backed a series of measures that set a limit of two presidential terms (a return to the pre-2015 situation that prevents Mr Correa from standing again in 2021), strip those convicted of corruption of their civil rights, reform the Consejo de Participacion Ciudadana y Control Social, the body that decides on judicial appointments and that was controlled by Correa's supporters, and restrict oil drilling in Yasuni Natural Park. Despite this victory, President Moreno's approval rating has declined steadily since peaking at 77% in August 2017, falling to 45% one year later, mainly due to the worsening economic situation. He also holds a slim legislative majority (74 seats out of 137), which is undermined by internal party dissensions.
The business environment remains weak, with significant difficulties in investor protection, default resolution and taxation. As a result, Ecuador came 118th out of 190 in the World Bank's Doing Business 2018 ranking.