Economic studies
Ecuador

Ecuador

Population 16,279 million
GDP per capita 6196 US$
C
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Synthesis

Major macro economic indicatorS

  2013 2014 2015  2016 (f) 2017 (f)
GDP growth (%) 4.5 3.6 0.3 -2.2 -2.6
Inflation (yearly average) (%) 2.7 3.5 3.9 2.4 1.1
Budget balance* (% GDP) -4.5 -5.2 -5.1 -6.7 -4.9
Current account balance (% GDP) -1.0 -0.5 -2.2 -1.4 -0.8
Public debt (% GDP) 25.9 31.1 33.8 39.5 39.6

*(f): Forecast

STRENGTHS

  • Significant mineral, oil and gas reserves
  • Approaching energy self-sufficiency thanks to hydroelectricity
  • 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 is expected to continue into 2017

The Ecuadorian economy, essentially underpinned by public spending made possible by oil and gas revenues, suffered with the collapse in oil and gas prices and entered into recession in 2016. An already weakened economy suffered further with the earthquake in April 2016 that caused damage to agricultural and aquacultural infrastructures, in addition to the heavy human toll. It is likely that the contraction in activity will continue in 2017, despite a slight recovery in oil prices. Non-oil exports are likely to suffer a loss of competitiveness, under the effect of the appreciation of the US dollar (which has replaced the sucre, the local currency) against the Colombian and Peruvian currencies (its leading trading partners in the region). Household consumption is expected to remain weak, under the weight of increased unemployment, frozen wages, increases in some taxes and import restrictions. Public investment is set to remain at a low level, as the government attempts to bring the budget deficits under control and prevent a further worsening in the level of debt and to prioritise politically important social expenditure rather than capital expenditure. There is also a reduction in interest among private investors because of the uncertain legal context and the rise of the dollar against the other currencies in the region. The dollarization of the economy and the slowdown in domestic demand in particular should contribute to reduced inflation.

 

The budget restrictions set to continue

There was a substantial increase in the public deficit in 2016, despite the measures aimed at limiting the growth in the size of the deficit (wage freezes for government employees, increased import duties, cuts in subsidies, etc.). Revenues have suffered as a result of the collapse in the price of oil (between 2014 and 2016 public revenues associated with oil and gas dropped from almost 28% of the total to approximately 19%) and the contraction in economic activity, leading to a falling off in tax receipts. The earthquake in April further increased the demands on State finances, partly covered by IMF aid. In 2017, the Ecuadorian government will have to continue its restrictive budgetary policy and focuses on expanding the private sector. As part of this the government has approved new tax measures and fiscal incentives: a corporation tax exemption for those companies providing private health insurance cover for their employees, a waiving of taxes on Ecuadorian capital held abroad provided that it is repatriated and invested in productive activities in Ecuador. Small and mid-sized companies located in the Peruvian and Columbian border regions are to receive VAT exemptions in order to boost their competitiveness following the depreciation of these countries’ currencies, and reduce the contraband trade in now cheaper Peruvian and Columbian goods. The country could also go to the international markets but at a higher cost. The public debt is thus likely to increase to almost 40% of GDP, the legal threshold defined in the constitution.

 

The weakness of domestic demand should help reduce the current account deficit

The current account deficit should continue to shrink in 2017, with imports in decline because of the weakness of domestic demand and despite the strength of the dollar which is making imports cheaper (Ecuador is a dollarized economy). The current account balance will also feel the benefits of the upturn, even small, in oil prices. Exports of oil and its derivatives effectively account for nearly 50% of the country’s exports and 20% of its imports. The balance of services will remain in deficit, with freight costs and oil sector services payments to foreign companies exceeding tourist revenues. The income balance is suffering as a result of significant capital withdrawals and FDI, in decline, will not be enough to offset the current account balance deficit. Finally, the slowdown in the US economy could also hit the flow of funds sent by Ecuadorian workers, most of whom live in the United States.

 

The former Vice-President, Lenin Moreno, favourite to win the 2017 Presidential elections

The next presidential and parliamentary elections in Ecuador are scheduled for February 2017. The official candidate of the Alianza Pais (PA) party, the party of the current President, Rafael Correa, is his former Vice-President (2007-2013), Lenin Moreno. Despite pro-Correa lobbying aimed at calling a referendum to allow the President to run again, he has stated that he does not wish to stand in 2017. The PA candidate is, according to the polls, the favourite, but the election is not a foregone conclusion because of the splits that are emerging within the left majority and the decline in the government’s popularity. The right has however failed to take advantage of this as it is in a similar situation with divisions breaking out between the more extreme and the more moderate factions. The serious level of judicial instability in Ecuador continues to undermine a business climate that remains mediocre. The lack of access to international arbitration courts, the interventionist nature of the Government and the weakness of raw material prices, are all limiting the attractiveness of the country.

 

Last update: January 2017

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