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Country Report Ecuador

Country Report


Ecuador flag

In 2014, Ecuador returned to the international capital markets with a bond issue that improved liquidity. But, the external position remains weak and under pressure from low oil prices and falling remittances. The interventionist and nationalist tendencies of the Correa government continue.

Strengths (+) and weaknesses (-)

(+) Generous resources endowment

Ecuador is rich in resources, both below ground, such as oil and gas, and above ground, such as a high potential for generating hydropower and a diverse climate, which makes Ecuador suitable for growing various crops and attractive for tourists.

(-) Bad payment morale

Since independence, Ecuador has defaulted 10 times on sovereign debt and has spent 58% of the time in default. This track record has given Ecuador the reputation of a serial defaulter. Unwillingness to pay was the reason behind some default incidents, which makes matters worse.

(-) Reliance on the oil sector

Oil accounts for around 25-30% of total government income and 57% of total exports. Besides, economic growth is highly reliant on public investments and, thus, on oil revenues. Therefore, Ecuador’s economy is susceptible to volatility in global oil markets.

(-) Populist regime hurts business climate

Ever since in office, President Correa has consolidated power in his function and economic policy has become increasingly interventionist (e.g. interest rate ceilings, imports restrictions), which is detrimental for the business climate.  

Key developments

1. New bond issue improves external position, but from a very low base

Following the default in 2008, Ecuador lost access to international financial markets. Consequently, Ecuador became reliant on financing from South American multilateral organisations and China. In June 2014, Ecuador returned to the international capital markets with the issuance of a USD 2bn 10 year bond. The receipts have improved Ecuador’s external liquidity position, though coming from a very low base. For example, import cover soared from 1.3 months in 2013 to 2.2 months in 2014, but this is still alarmingly low. Besides, an expansive fiscal policy and lower FX receipts due to lower oil prices and lower remittances, against the background of a dollarized economy that needs high USD inflows, will lead to higher pressures on the already low FX reserves. This could threaten the dollarization regime that has led to macroeconomic stability and increase the chances of a balance of payments crisis. Readily available external financing provides some comfort, though. Moreover, large hydroelectric projects expected to be completed in 2016 should reduce Ecuador’s fuel imports and ease pressures on the current account balance as a result.  

2. Fiscal balances deteriorate

Significant public sector investment in especially infrastructure, which accounted for around 16% of GDP in 2013, has supported solid economic growth in recent years. But, it also led to a steep increase in the budget deficit, which soared from around 1% of GDP in 2010-2012 to around 5% of GDP in 2013 and 2014. Consequently, public debt is expected to double between 2010 and 2015 to around 34% of GDP. Public debt levels remain low, but this is mainly the result of a USD 3.2bn default on government debt in 2008 (restructured in 2009), which reduced public debt from 21% of GDP in 2008 to 15% of GDP in 2009. A long period of low oil prices is poised to seriously hurt government income, which increases the chances of another voluntary default on debt, as the government might once again prioritize social and capital spending above the interests of its creditors, as it did in 2008. Lower government income would also affect economic growth and could spark social unrest.

Figure 1: External position remains weak
Figure 1: External position remains weakSource: EIU
Figure 2: Fiscal balances deteriorate
Figure 2: Fiscal balances deteriorateSource: EIU

3. Increasingly autocratic political regime

President Correa is currently attempting to change the constitution to remove the limit on presidential terms so that he can run for president indefinitely. Given Ecuador’s track record of political instability and the fact that Correa is its longest serving president, the change could improve political stability in Ecuador. However, it will also erode the already weak democratic checks and balances. It also increases the chances that the President will further consolidate his power and that Ecuador evolves into an administered socialist regime similar to Venezuela. Last but not least, recent local elections indicated that anti- government sentiment is growing, so such a move could spark mass popular protests.

Factsheet of Ecuador
Factsheet of EcuadorSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Ecuador is a small country on the North-Western Coast of South America, bordering Colombia and Peru. Following many currency regimes and a banking, economic and currency crisis in 1999, Ecuador adopted the US Dollar in 2000, thereby giving up control of monetary policy and of the possibility for the Central Bank to act as a lender of last resort. The full dollarization of the economy has improved macro-economic stability. However, the investment climate is very difficult on the back of unpredictable policies, weak institutions and a high level of corruption. Import restrictions and capital controls further contribute to the cumbersome business climate. A large share of the Ecuadorian population, between two and three million people, lives abroad and provides a structural inflow of remittances that support the current account balance and domestic demand. At home, development is poor and inequality remains high despite significant progress in recent years. Ecuador gained independence from Spain in 1822 and was part of the Gran Colombia Federation until 1830. Civilian governments have been in power since 1974, but this period was marred by political instability, including presidents being ousted through popular protests. Rafael Correa is the first president to stay in office for a longer period of time, namely almost eight years. During his time in office, the president has concentrated power in his function. General elections are held every four years and the last ones took place in 2013. Ecuador’s society is characterized by tensions between the economic heartland in the coastal region and the administrative and educational centre in the highlands. Ecuador hosts the most active volcano in the world, the Cotopaxi in the Andes, so earthquakes are frequent.

Economic indicators of Ecuador
Economic indicators of EcuadorSource: EIU
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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