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 allows 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 is subject to the evolution of the dollar because of 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
Continuing moderate economic recovery
In 2022, the economy will continue to pick up supported by private consumption and gross fixed investment. Private consumption (around 59% of GDP) will remain the main driver of the economy as pandemic-related measures are lifted, and the vaccination campaign reaches the target (60-70% of the population vaccinated at end of 2021 ), making households‘ demand stronger. Despite the economy being fully dollarized, inflation should still increase as international commodities prices will remain high. Gross fixed investment (25% of GDP) will moderately increase as President Lasso’s administration has not had sufficient legislative support, despite the submission of a reform package (“Law for Creating Opportunities”) in September 2021. An executive decree might be the solution, as President Lasso issued one to attract private investments in the electricity sector (late October 2021). We expect limited investments in the oil sector as Mr. Lasso wants to diversify from it. Four major mining projects (gold and copper) are expected to begin during his mandate. Government consumption (14%) will be moderated as the 27-month Extended Fund Facility (EFF) for USD 6.5billion agreed on with the IMF in September 2020 by the former Moreno administration, and renegotiated with Lasso’s administration, comprises a pledge to cut spending. Exports of crude and refined oil products will slightly increase as global demand is growing and international prices are expected to slightly increase, and Ecuador, not anymore an OPEC member, is free to increase its production. Shrimp, canned fish, bananas, cocoa, and cut flowers are other main exports, which will benefit from the U.S. and European demand, although some issues in terms of delivery chains are expected.
Ample fiscal consolidation and an improved external position
The current account should again be in surplus in 2022 as the global economy continues to pick up. The trade-in goods surplus will persist. Oil and non-oil exports will remain resilient, while imports might see an increase as domestic demand gets stronger. Additionally, we expect advanced discussions with the U.S. over a free trade agreement and the regional trade block (Pacific Alliance), which might positively impact trade. The services deficit should remain significant, as inbound tourism is slowly recovering. The primary income deficit will be moderated following the restructuring of the sovereign debt in 2020 (a total amount worth USD 17.4 billion in bonds). Meanwhile, secondary income will be in surplus as workers’ remittances from the U.S., Spain, and Italy have significantly increased. Foreign companies’ direct investment might return as the Lasso administration’s reforms boost confidence. FX reserves are expected to remain under 5 months of imports. After years of deficit, the budget balance should record a minor surplus in 2022 as authorities are expected to increase the upper-income tax bracket and the wealth tax. Oil Additionally, there should be financing within the IMF’s EFF (USD 1.7 billion ). Moreover, Ecuador received the equivalent of USD 934 million in Special Drawing Rights from the IMF in August 2021, an amount that was put in an account with the central bank. Non-resident holding of total public debt is relatively high (75%). Official creditors own 40% of total external debt.
Reforms submitted to cohabitation and social unrest
In the second round of the presidential election (April 2021), the center-right Creando Oportunidades party candidate, Guillermo Lasso won. However, with the National Assembly dominated by leftist parties, his policies could face some headwinds. His initial strong popular support that could have led the National Assembly to compromise has been eroded by his emergence in the Pandora Papers and the 60-day nationwide state of emergency enforced since late October 2021 to fight drug trafficking. As the presence of rival drug cartels is increasing (entailing bloody riots in jails) and poverty and inequality (especially regarding minorities) have grown with the pandemic, we expect additional social unrest in 2022, which could derail fiscal consolidation and other reforms.