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Saturday, April 13, 2024

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Ecuador

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GDP: USD115.0bn (World ranking 63)
Population: 18.0mn (World ranking 66)
Form of state: Presidential republic
Head of government: Daniel Noboa (President)
Next elections: 2025, Presidential and legislative

Strengths

  • Significant oil reserves
  • Unexploited mining resources
  • Dollarization of the economy limits transfer and currency risk and anchors inflation
  • Recently improved road network
  • Major exporter of bananas, cocoa and palm oil
  • High tourism potential linked to biodiversity

Weaknesses

  • Dependence on oil production and high vulnerability to global oil prices
  • Monetary policy limited by dollarization
  • Low level of FX reserves
  • Limited access to international capital markets due to successive debt defaults
  • High rates of informal employment
  • Rise in violence linked to gangs, organized crime and political crises

Economic overview

Slowing economy

“After a period of robust growth, Ecuador has grappled with the challenge of mitigating the impact of falling oil prices, upon which its economy heavily relies, since 2014. The country experienced a recession in 2020, recording a contraction of -7.8%, before modestly rebounding with a +4.2% growth in 2021. In 2022, its economy expanded by +3.0%, falling below the regional average of +4.8% and growth is estimated at +1.4% in 2023. Despite the full dollarization of the country since 2000, which addressed some imbalances, Ecuador continues to wrestle with structural weaknesses, including its dependence on oil exports, high rates of informal employment and limited access to capital markets, marked by several instances of default.

Furthermore, Ecuador faces heightened challenges due to a surge in nationwide violence in recent years, stemming from gang violence and organized crime, leading to increased political risks and disrupting economic stability. The recent Metastasis case, a large corruption scandal, highlights the growing influence of narcopolitics, further weakening Ecuador’s rule of law and business environment. In 2024, we anticipate GDP growth to recover to +1.8%, driven by increased attractiveness for foreign investors, albeit constrained by a ban on the exploitation of oil and mining in a major oilfield of the country. Looking ahead, the growth outlook for the 2025-2028 period remains modest, hovering around +2%.

The inflation situation in Ecuador has not been as dramatic as in other Latin American countries in the past two years, for the dollarization of the economy has anchored inflation expectations and eliminated currency risks. Average inflation peaked at 3.5% in 2022 and is since then decreasing, to an estimated 2.3% in 2023, well below regional peers. The inflationary pressures, which mainly came from food, transport prices and non-tradables, eased rapidly after the crisis, thanks to dollarization and subsidized fuel prices. The dollarization deprives Ecuador from it’s independence as to monetary policy, although the country has a central bank (Banco Central del Ecuador, BCE) managing international reserves. The country is dependent on the Fed’s policy rate, which we expect to stay on a plateau at 5.5% until mid-2024, before the start of an easing cycle when and if US inflation normalizes fully. Despite this easing cycle, local interest rates should stay elevated in Ecuador, as the country’s liquidity= situation is more and more jeopardized and high-risk premiums stay the norm.

Conjunctural improvements don’t account for a solid fiscal path

Ecuador’s fiscal situation has improved in the last few years, thanks to several fiscal consolidation reforms and help from the International Monetary Fund (IMF). In September 2020, Ecuador and the IMF signed an Extended Fund Facility (EFF) lasting for 27 months, until end of 2022. The EFF allowed Ecuador to stabilize the macroeconomic imbalances ensuing the Covid-19 crisis and to build fiscal buffers, but political instability prevented it from gaining financial markets access. Therefore, the country has to implement further fiscal consolidation to gain market access, which is a declared goal of President Daniel Noboa. But strong fiscal consolidation is still in question, since Noboa has to account for the 2025 presidential election and since the economy also needs a stimulus. We expect government deficit to be relatively stable at around 2.3% on average in the 2024-2028 horizon. Public debt levels have peaked in 2020, before decreasing towards the pre-pandemic level at 56.3% in 2023.

On the external position side, Ecuador is highly dependent on oil exports: between one third and half of its total exports are crude oil exports, throughout the years. A large share of its trade balance is therefore determined by oil prices. In 2014- 2015, when global oil prices fell considerably, oil exports in value decreased by 28.7% and have still not recovered. On top of that, oil drilling and mining are increasingly controversial, because of their devastating ecological impact in a country which has a rich biodiversity and indigenous people it wants to protect. In August 2023, Ecuadoreans voted to ban mining in the Chocó Andino region and oil drilling in the Yasuní oilfield, which accounted until then for 12% of the country’s production. As a direct result, we expect Ecuador to register a current-account deficit again in 2024, which will then resorb gradually until 2027. The international reserves situation sparks concerns, with the import cover, already low, deteriorating to under two months in 2023.

Weak business environment and rising risks to governability

Ecuador ranked 119th out of 177 worldwide in the 2023 Heritage Foundation’s Index of Economic Freedom survey, gaining seven places compared to 2022 and 24th out of 32 in the Americas. Its main strengths lie in monetary freedom – the US dollar is the official currency – and tax burden, but it obtains very poor scores in rule of law, as property rights, judicial effectiveness and government integrity are worsE than the world’s average. The restricted access of Ecuador to investment markets leaves the country very poorly ranked in open markets freedom. Our proprietary Environmental Sustainability survey rebalances the picture, since it ranks Ecuador 33rd worldwide. The country indeed enjoys a good energy use per GDP, climate change vulnerability and an outstanding water stress situation, although it has weaknesses in renewable electricity output and recycling.

Following the anticipated elections in October 2023, which occurred in the aftermath of a political crisis at the beginning of the year that led former President Guillermo Lasso to dissolve the National Assembly, the center-right candidate Daniel Noboa emerged victorious. Notably, Noboa secured the presidency with a minimal representation in Ecuador’s sole legislative house. A businessman and the son of a long- time presidential candidate, Mr Noboa has been a deputy since 2021, aligning ideologically with former President Lasso’s principles of economic orthodoxy, fiscal responsibility and a robust stance against the prevailing resurgence of violence.

During his campaign, Noboa pledged to prioritize job creation and impose stricter penalties for tax evasion, garnering favor from the financial markets. However, Mr Noboa, whose term is slated to last one and a half years until 2025, lacks a majority in the National Assembly, holding a meager number of deputies (14 out of 137). The largest group in the National Assembly belongs to the radical left Revolución Ciudadana (RC) with 52 seats out of 137. In order to secure political stability, Mr Noboa formed a coalition with RC, as well as the conservative Partido Social Cristiano (PSC) and the centrist party SUMA. While this coalition helps avoid strong opposition from RC, it also compromises Mr Noboa’s reform agenda, as he must tailor his program to accommodate his allies. A recent corruption scandal involving the RC party introduces a risk to governability, potentially jeopardizing the stability of the legislative coalition.

 

CEOWORLD magazine - Insights - Ecuador