Ecuador: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant mineral potential (copper, gold, etc.), oil and gas
- Tourism potential (flora, fauna, heritage)
- Climate diversity allowing for many crops
- Marine resources: number one exporter of shrimp and prawns
- Relatively low inflationary risk due to full dollarization
- Oil-dependent economy
- High seismic risk: volcanic eruptions
- Competitiveness subject to changes in the dollar owing to full dollarization
- Largely informal economy and low qualification of the workforce
- History of sovereign default
- Deficient business environment: corruption, opaque public procurement, interventionism
- Weak domestic and foreign private investment
- Ecuador is a transit point for drugs on route to the US and Europe, which is a cause of violence and gang activity
CONTINUING ECONOMIC RECOVERY
In 2023, the economy is expected to fill the GDP gap triggered by the COVID-19 pandemic. Private consumption (roughly 62% of GDP) will remain the economy’s main driver amid a stable job market and as consumer price pressures ease somewhat. Despite relevant fuel subsidies (estimated at 2.6% of GDP in 2022) and the fact that the economy is fully dollarized, domestic prices were only partially spared in 2022 by the sharp rise in international commodities. Meanwhile, gross fixed investment (21% of GDP) will increase at a slower pace, dampened by climbing global borrowing costs, President Lasso’s lack of legislative support (hampering the passage of a more pro-business agenda), and recurrent social pressures to stall projects due to environmental matters. The lack of fiscal headroom will moderate government spending (15%). In this regard, in September 2020, the previous Moreno administration and the IMF agreed to a 27-month Extended Fund Facility (EFF) for USD 6.5 billion, which Lasso’s administration took over after renegotiating and compromising over the pledge to cut public spending. Despite weakened global growth affecting the significant markets for Ecuador´s foreign sales (such as the US, China, Panama, and the European Union), exports will grow. Aquaculture -horticulture, agriculture, and agro-industry exports (chiefly shrimp, canned fish, bananas, cocoa, and cut flowers), as well as crude- and refined-oil product exports (both of which contribute to 32% of total foreign sales), will slightly increase as their international prices remain at durably historically elevated levels. Ecuador, no longer an OPEC member, can increase its oil production.
LOW FISCAL DEFICIT AND EXTERNAL ACCOUNT SURPLUS, WITH CREDITORS’ HELP
The current account should return to surplus in 2023, notably driven by the trade balance surplus (3.1% of GDP in 2021), with the pace of export growth exceeding that of imports. Meanwhile, the secondary income surplus (3.7% of GDP) should decrease as workers’ remittances from the U.S., Spain, and Italy weaken somewhat in light of the expected worsening of their job markets. Additionally, the services deficit (-2.4% of GDP) should narrow as inbound tourism recovers and freight costs are curbed. Furthermore, the primary income deficit (-1.6% of GDP) will be reduced following the restructuring of sovereign debt with China in September 2022 (providing relief worth some USD 1.4 billion until 2025). In addition, foreign exchange reserves in September 2022 assured an import coverage of 3.4 months. Regarding the fiscal accounts, the budget balance should still record a slight deficit in 2023, with public revenues favored by increased activity and historically high oil prices. In addition, multilateral lending (including the World Bank, CAF, Inter-American Development Bank, and the IMF) will remain the primary source of financing. Gross public debt, 74% of which is external (48% owed to multilateral and 38% to markets), is expected to keep its downward trend thanks to the primary surplus and resilient growth.
WEAK GOVERNABILITY HAMPERS THE LIKELIHOOD OF MOVING AHEAD WITH A PRO-BUSINESS AGENDA
The center-right President Guillermo Lasso, who took office in May 2021, faces a governability challenge with the National Assembly dominated by leftist parties and declining popularity. For example, in March 2022, Parliament rejected and shelved Lasso’s investment bill, which the ruling party considered vital to the country’s economic recovery (a new version was drafted in October 2022). Moreover, in June 2022, strikes rocked the country for 18 days due to high fuel prices and the consequent increase in the cost of living. Initiated by the indigenous group CONAIE (Confederación de Nacionalidades Indígenas del Ecuador), other sectors joined the protests, affecting oil production and commercial activity. The same group also called for Lasso’s impeachment was supported by opposition members at the end of June 2022, which Lasso narrowly survived. Social unrest only eased when the government and CONAIE reached a preliminary 90-day agreement. Following months of talks, in October 2022, the two sides reached a deal, which created a mechanism for differentiating fuel prices to ensure that subsidies only benefited the most vulnerable sector of the population and wrote off some small-scale farmers’ debts. It also defined a moratorium on 15 oil blocks and suspended some mining concessions until a new law was introduced. Nevertheless, the president of CONAIE pointed out that a strategic plan for implementing these agreements is still pending. The risk of renewed social unrest cannot be ruled out. In addition, overcrowding in Ecuadorian gaols has also prompted increases in violence (at least 400 people have died in custody since late 2020), the blame for which the government places on drug gangs that are retaliating for its efforts to combat them. The current government has called a state of emergency over rising crime several times. Regarding foreign policy, in November 2022, the country agreed to create a fair-trade working group with the US to explore potential negotiations on labor, the environment, and digital trade. In addition, in January 2022, the Pacific Alliance announced that Ecuador was a candidate for accession to the group as a full member.