Ecuador: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant mineral oil and gas potential
- Tourism potential (flora, fauna, heritage)
- Diverse climate allows for a wide range of crops
- Marine resources: leading exporter of shrimp
- Low risk of inflation due to fully dollarized economy
- Economy dependent on oil
- Competitiveness subject to US dollar performance due to fully dollarized economy
- Large informal economy and poorly qualified workforce
- Legacy of sovereign default
- State interventionism
- Credit is expensive and underdeveloped; weakness of small banks
- Low levels of domestic and foreign private investment
Timid Exit From Recession
The economy is struggling to recover: public spending fueled by oil revenues – its traditional driver – is anemic. The dollarization of the economy since 2000 has helped macro-economic stability, but low oil prices are exacerbating the country’s weaknesses (low competitiveness, inefficient and expensive public services, rigid labor market). Internal demand is still performing weakly, and the slight upturn in household consumption seems to have fizzled out. While inflation will remain weak because of the fully dollarized economy, household income will likely continue to be affected by wage freeze (not counting the 10% cut in senior civil servants’ salaries), as well as rising poverty rates and under-employment (only 39% of the workforce were in full-time employment in March 2017). In addition, the informal economy, which concerns 45% of jobs, means that many households do not benefit from the minimum wage or social benefits.
Public investment is expected to fall further. The government is making efforts to reduce the fiscal deficit, so as to prevent the debt from further hikes, and is prioritizing politically important social spending rather than capital spending. Meanwhile, interventionism and the lack of competitiveness reduce private investor interest.
Exports might pick up slightly: oil sales are expected to benefit from firm prices, the slight upturn in production after the decision to no longer comply with OPEC’s ceiling, and operations at the new oilfields in the Yusuni national park by the national company, Petroamazonas (78% of domestic production). Exports of bananas, shrimps, tinned fish, and flowers will likely benefit from the strong performance of the North American and European markets. In contrast, cocoa exports will continue to disappoint because of the drop in production and low prices caused by both a fall in quality and disease affecting the cacao trees. Other sectors (including textiles, chemicals, pharmaceuticals, leather, and wood) will continue to be disadvantaged by their lack of competitiveness outside the dollar zone. Given that imports will be overshadowed by weak domestic demand, trade’s contribution to growth will be slightly positive.
Public Debt Requires Supervision; External Financing is Fragile
Lenin Moreno, president since May 2017, has inherited a growing public debt burden, aggravated by the widening deficit. Declining oil revenues have not been matched by spending cuts, in large part due to reconstruction costs following the 2016 earthquake, the recession, and rising debt interest payments. In October 2017, the country once again issued ten-year bonds for USD 2.5 billion with a coupon of 8.875%. Following the public referendum scheduled for early 2018, steps will likely be taken in an attempt to sufficiently bring down the deficit so as to control the debt. This will be tough, as the president needs to find a compromise with the center-right opposition, while also keeping those on the left of his party in line. This is compounded by poor prospects of a rapid rise in oil revenues, due to problems with the execution of construction contracts for a refinery, a gas liquefaction plant, and two oil pipelines. Meanwhile, production at fields awarded to the private sector is declining, reducing the benefits of increased output from fields operated by Petroamazonas.
Despite the restrictions on imports, the current account is likely to dip into the red again. Because of insufficient refinery capacity, the country has to import expensive oil products. In addition, accrued debt interest and profit repatriation exceed the value of remittances from expatriate workers. Finally, freight costs and oil sector service payments to foreign companies will exceed tourism income. Weak FDIs will not suffice to cover the deficit, so there will undoubtedly be a need to once more turn to external borrowing, potentially from China – who is already the country’s main foreign creditor and investor. Foreign exchange reserves are low, despite tax incentives for companies to repatriate their foreign exchange and the tax on capital outflows. In this context, the IMF carried out another local inspection mission. Renewed relations, after being suspended for ten years, could bring down the cost of finance, but at the price of faster fiscal consolidation.
Pragmatism of the New President, Lenin Moreno
The President and his predecessor Rafael Correa disagree over policy and are competing for control of their party, the Allianza Pais (AP). Cutting a softer left-wing image, Lenin Moreno (77% approval rating in September 2017) plans to hold a referendum in early 2018, aimed at limiting presidential terms of office to two years (a return to the pre-2015 position) – thus preventing Correa from standing in 2021 –, at removing civil rights from persons convicted of corruption, and at reforming the Consejo de Participacion Ciudadana y Control Social which decides on the appointment of magistrates and is controlled by Correa’s allies. Divisions within the party and across the political scene weaken the government. The AP’s number of seats (74 out of 137) fell in favor of the center and the right during the last 2017 elections.