Country Risk Rating

C
A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high. - Source: Coface

Business Climate Rating

B
The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.

Strengths

  • Significant mineral, oil and gas potential
  • Tourism potential (flora, fauna, heritage)
  • Climate diversity allows for a wide range of crops
  • Marine resources: number-one exporter of shrimp
  • Low inflationary risk due to fully dollarised economy

Weaknesses

  • Oil-dependent economy
  • Competitiveness subject to dollar movements due to fully dollarised economy
  • Large informal sector and low-skilled workforce
  • Legacy of sovereign default
  • State interventionism
  • Low levels of domestic and foreign private investment

Current Trends

Sagging growth, affected by austerity measures and the global slowdown

Growth will return to positive territory in 2020 but activity will remain very weak. The austerity measures put in place by the Moreno government to reduce public debt are weighing on household consumption and confidence. The civil service wage freeze, the non-replacement of one in two retirements, as well as the non-renewal of occasional contracts for the State will all affect consumption. The same need to reduce public spending will constrain public consumption and state investment. The repeal of the decree to eliminate fuel subsidies and the introduction of a less ambitious tax reform project allowed for a the situation to cool down after the widespread protest movement of October 2019. However, the possibility of a new wave of demonstrations cannot be ruled out. These political tensions, and the reduced prospect of fiscal consolidation, will lead to lower investment than envisaged following the signing of the agreement with the IMF in March 2019. The exit of OPEC from January 2020 and the resulting release of the organization’s production quotas should enable the country to increase its oil production. However, renewed tensions in the southern Amazon with indigenous communities opposing the development of oil sites in the region could undermine these projects. This would weigh on exports, which are also affected by the weakest demand in the United States, the country’s main partner, despite growth in agricultural exports (bananas, cocoa), and more particularly shrimp exports to China.

The banking and financial sector is to be reformed under the IMF agreement in order to strengthen the central bank's independence, safeguard the central bank’s credibility in maintaining full dollarisation of the economy, which was introduced in 2000, and keep inflation low. Liquidity requirements for banks should be relaxed under the IMF agreement to promote credit growth.

Faltering fiscal consolidation efforts and a fragile external position

In exchange for IMF financial support of USD 4.2 billion over three years under an extended credit facility obtained in March 2019, the government has committed to reducing public debt (70% external) whose share has doubled since 2013. The repeal of the decree ending gas subsidies and the new tax reform project of November 2019 have undermined these objectives. The new reform draft, presented after the rejection of the previous one, leaves aside the new export taxes and the mandatory advance on income tax for companies affected by the unrest at the end of 2019. On the other hand, the end of tax deductions for companies with an annual income of more than USD 100,000 and the special tax on the largest companies (income of more than USD 1 million) will be implemented. These measures should be insufficient to cope with the growing burden of debt service, with interest rates rising by 11.4% in the first quarter of 2019. However, the IMF’s repeated support to the government after the introduction of the new reform should allow for the disbursement of the next aid tranches following some adjustments to the objectives set initially in February 2019.

The external position will remain fragile despite the reduction in the current account deficit. More muted export growth should be offset by a contraction in imports due to lower household consumption and the fall in the price of oil, which should bring down the price of refined petroleum products imported by the country. However, remittances from expatriates are not expected to compensate for the repatriation of dividends by foreign companies, leaving the income balance in deficit. The current account deficit will be financed by foreign direct investment as well as by loans, given the very low level of reserves (less than two months of imports).

Growing unrest

Elected President in May 2017 to succeed Rafael Correa (2007-2017), Lenin Moreno of the left-wing party Alianza País (AP) faces a growing challenge on the domestic scene. The way that he has distanced himself from his predecessor and former ally Rafael Correa, after a referendum in February 2018 blocked the former President's chances of re-election, has wreaked havoc within the majority, where a battle rages between Correa and Moreno supporters. Meanwhile, the austerity measures put in place under the IMF agreement led to a widespread protest movement in October 2019, during which clashes between demonstrators and police resulted in several casualties. The upcoming parliamentary elections in 2021 are expected to fuel these political and social tensions further, as each side seeks to represent its interests.

The business environment remained below the regional average in 2020, with Ecuador ranked 129th out of 190, down from 2019. Investor protection, default resolution and corporate taxation are all areas where progress is expected.

Source:

Coface (02/2020)
Ecuador