Ekonomske analize
Ecuador

Ecuador

Population 16,279 million
GDP 6196 US$
C
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Synthesis

major macro economic indicators

  2014 2015  2016 (f) 2017 (f)
GDP growth (%) 4.0 0,2 -2.0 -1.6
Inflation (yearly average) (%) 3.6 4 1.7 0.3
Budget balance (% GDP) -5,2 -5.2 -6.6 -2.1
Current account balance (% GDP) -0,5 -2.1 1.3 1.4
Public debt (% GDP) 19.7 22.6 29.2 31.5

 

(e) Estimate (f) Forecast

STRENGTHS

  • Significant mineral, oil and gas reserves
  • Tourism potential (flora, fauna, heritage)
  • Range of climates and potential crops 
  • Fishing resources: 1st exporter of shrimps 

WEAKNESSES

  • Economy not diversified, dependency on oil
  • Lack of infrastructure (roads, dams) and shortage of trained workers
  • Legacy of sovereign default
  • Low levels of domestic and foreign private investment
  • Interventionist government
  • Credit is expensive and under-developed 

Risk assessment

The recession should ease

The Ecuadorian economy, traditionally driven by public spending fuelled by oil revenues, is expected to remain in recession in 2017. The dollarization of the economy since 2000 has helped macroeconomic stability, but falling oil price and the appreciation of the dollar since 2015 have exacerbated the country’s fragilities (dependence on oil, low competitiveness, inefficiency, high cost of public services, rigidity of the labour market). By 2017, oil export revenues are expected to increase, but they will be limited by OPEC's agreement. Moreover imports are expected to grow modestly, reflecting the weak dynamism of consumption and investment. Household consumption would still be sluggish, because of wage freezes, rising taxes, increased poverty and underemployment (only 38.5% of the labour force worked full-time in March 2017). Inflation should remain limited, thanks to a strong dollar and a weak domestic demand.

Public investment is expected to remain anaemic. The reason is backed by government´s necessity to control the budget deficit and the subsequent hike in public debt. The same tends to favour politically important social spending rather than capital spending. Besides that, the volatile legal framework and the appreciation of the dollar against other currencies in the region may also daunt private investment.

 

The public deficit gets better but the debt should be monitored

The new president Lenin Moreno inherited a challenge economic environment, marked by an increasing public debt, heightened by the widening budget deficit linked to the fall in oil revenues. Additionally, after the strong earthquake of 2016 reconstruction works are also necessary. Public spending is expected to increase by 5% between 2016 and 2017, and tax revenues by 8.9%. There are two opposite trends: on the one hand, the reduction in infrastructure spending, especially in reconstruction, and the gradual increase in oil revenues will lead to an improvement in the public accounts; on the other hand, during his election campaign, Lenin Moreno promised to increase social spending (new housing programs, increase in low pensions, etc.). Currently public debt does not exceed the constitutional limit of 40% of GDP, thanks to a recent methodological revision.

 

Tenuous current account surplus

Despite the decline in oil prices, the country recorded a trade surplus of $1.6 billion in 2016. The current account is expected to remain in surplus in 2017 thanks to weak imports. The balance of services will remain in deficit, with freight costs and oil sector services payments to foreign companies exceeding tourist revenues. The same could be said for the income balance, which is suffering from significant capital outflows related to foreign investments and debt. The capital account will be supported by bilateral Chinese financing ($2billion after the earthquake, for example), but FDI will remain relatively low.

 

Political stability notwithstanding the change of president 

On April 2nd 2017, Lenin Moreno was elected president with 51.1% of the vote and took office on May 24th. He is the successor of Rafael Correa who could not run for another mandate, both members of the Alianza Pais party. Correa could still have an important influence, because political figures closed to him hold major positions in the legislative system. Internal divisions within the party and in the political scene risk making the governance of Moreno complex.

Externally, the United States remain the country's largest trading partner. Despite that, the bilateral investment agreement between the two countries, as those with the countries of the European Union and some Asian countries, has been judged unconstitutional by the National Assembly, requiring their renegotiation. This retains a sense of continuity with the presidency of Rafael Correa, who wanted to foster foreign investments in order to diversify the very dependent oil economy. 

 

Last update: June 2017

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