Country Risk Rating

D
A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very 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 potential (copper, gold, etc.), oil and gas potential
  • Tourism potential (flora, fauna, heritage)
  • Climate diversity allowing for many crops
  • Marine resources: number one exporter of shrimp and prawns
  • Low inflationary risk due to full dollarization

Weaknesses

  • Oil-dependent economy
  • Competitiveness subject to the evolution of the dollar because of its full dollarization
  • Largely informal nature and low qualification of the workforce
  • History of sovereign default
  • Weak public resources and poor targeting of social protection
  • Deficient business environment: corruption, opaque public procurement, interventionism
  • Weak domestic and foreign private investment

Current Trends

A recovery limited by local factors

In 2021, the upturn in activity will mainly be driven by household consumption, while the political climate weighs on private investment and austerity on public spending. The gradual end of lockdown measures, in the absence of a new rebound in the epidemic, is expected to allow a recovery in private consumption, supported by very low inflation in a largely dollarized economy. However, the high unemployment rate, at 10% at the end of 2020 compared with 5% at the end of 2019, is expected to limit its dynamism. Public consumption will be constrained by the Moreno government's fiscal consolidation policy implemented under the IMF agreement. Investments are expected to be affected by the gloomy global context and their level is expected to largely depend on who wins the presidential election of February 2021 and the policy towards nationalizations. The various legal actions by indigenous communities against mining projects, such as the one at the San Carlos Panantza copper mine operated by the company ExplorCobres, will also contribute to slow down investment projects. The victory in the presidential elections of Andrés Arauz (a protégé of Rafael Correa, known for his nationalizations) or Yaku Pérez (who is close to the indigenous communities) could further complicate the exploitation of the country's mining potential, limiting the growth of the sector in 2021 beyond a base effect. For its part, the oil sector is expected to benefit from a higher average price, since Ecuador is no longer a member of OPEC since 1 January 2020. The construction sector is expected to suffer from the decline in public spending on infrastructure. The fishing sector will benefit from increased shrimp sales in China, while banana and cocoa exports will be buoyant in the absence of poor weather conditions. The tourism sector (6% of GDP) is expected to remain sluggish, as is the case everywhere else in the world.

Fiscal consolidation at the mercy of politics and a strengthened external position

The pandemic crisis has only exacerbated the weaknesses in public finances, despite efforts to comply with the IMF agreement of March 2019. The expected delay in mining projects is unlikely to generate the USD 4 billion in tax revenues expected by the government, while oil revenues have declined with falling prices and are only expected to grow moderately in 2021 with the price of oil still low. The government, which has become heavily dependent on funding from multilateral agencies, is expected to continue to pursue a policy of expenditure reduction, although there is uncertainty related to the February elections. After obtaining initial emergency aid from the IMF in May 2020 to finance the fight against the pandemic, in September 2020, the government negotiated an extended credit facility with the IMF for USD 6.5 billion, receiving USD 2 billion on the signature, 2 billion at the end of 2020 and the balance before 2022. Prior to this agreement, a reorganization of its bilateral debt with China, largely secured by oil revenues, was obtained (USD 900 million over 2020-2021), as well as a restructuring of its bond debt for a total of USD 17.4 billion revolving around ten sovereign bonds maturing between 2022 and 2030. They were swapped for three others maturing in 2030, 2035, and 2040, and the creditors accepted a 9% discount on the principal value. In addition to postponing and extending its service, this reduced debt repayment requirements by USD 1.6 billion.

Regarding the external accounts, the compression of imports and the relatively good performance of non-oil exports during the crisis enabled the current account balance to shift from a deficit to a surplus. This surplus is expected to persist in 2021, albeit at a lower level. Indeed, the recovery of domestic demand is expected to lead to a reduction in the trade balance surplus, but without erasing all the gains made over 2020, thanks to the rise in prices that will boost oil exports. In addition, the restructuring of the debt is expected to reduce interest payments and thus limit the primary income deficit, which is expected to be offset by expatriate remittances, which will be greater thanks to the recovery of activity in the United States, Spain, and Italy. This current account surplus, together with the funds obtained from multilateral lenders, is expected to strengthen the stocks of foreign exchange reserves (3.4 months’ worth of imports at the end of 2020) and support the dollarization of the economy.

A high-stakes election

Uncertainty persists as to the direction of medium-term policies given the large ideological differences between the candidates for the top job. Candidates for the February 2021 presidential elections, of whom there are 17, are highly fragmented, and no candidate appears likely to win in the first round. Leading the polls are center-right Guillermo Lasso, Andrés Arauz, protégé of Rafael Correa, on the left, and Yaku Pérez, who is closer to the indigenous groups, also on the left. All the candidates expressed a certain form of reluctance, more or less strong, towards the IMF agreement, with the major demonstrations at the end of 2019 in mind. G. Lasso is, however, most likely to open dialogue with the IMF based on a more inclusive agreement that provides assistance to those most in need. However, the adoption of new reforms could in any case be complicated by an assembly that is likely to break up after the legislative elections scheduled for the same date.

Source:

Coface (02/2021)
Ecuador