ECUADOR COFACE ASSESSMENTS
B
Country risk
B
Business climate
HIGH RISK
Medium term
MAIN ECONOMIC INDICATORS
2012
2013
GDP growth (%)
5.1
4.4
3.8
Inflation (yearly average) (%)
4.1
2.7
3.9
4.1
Budget balance (% GDP)
2014 (e)
2015 (f) 1.5
-1.1
-4.7
-4.2
-4.5
Current account balance (% GDP)
-0.3
-1.3
-0.8
-2.4
Public debt (% GDP)
21.3
24.3
27.0
34.0
Deteriorating public accounts because of the fall in oil revenues The public deficit is expected to grow because of the fall in the price of oil, which represents 40% of public revenues. The country’s 2015 budget, which was approved on the basis of the oil price at USD 79.7 a barrel, has been revised downwards (-4% in January 2015) because of the recent drop in prices. The government has, moreover, imposed new taxes and customs duties on imports since January with the aim of maintaining the country’s liquidity in dollars (dollarised economy). The country expects it will need additional financing of about USD 7.2 billion over the year, of which USD 5.3 billion (at 2% over 30 years) has already been agreed by China. The country can also resort to the international markets as it did in 2014 (bond issue of USD 2 billion over ten years at 7.95%, its first since a selective default in December 2008), but at higher cost, given a possible increase in US interest rates. This is pushing up external public debt which is expected to exceed 34% of GDP in 2015, but will remain at a relatively low level. The debt is mainly held by China, whose loans are secured on the grant of mining concessions, oil revenues and future electricity production. Increased current account deficit affected by the fall in the oil price and the appreciation of the dollar The current account deficit is expected to widen due to the deteriorating trade balance, affected by the fall in the price of oil products and the appreciation of the
(f): forecast
TRADE EXCHANGES
RISK ASSESSMENT Growth set to slow in 2015 The country’s growth, mainly sustained by public spending, is expected to suffer from the fall in the oil price. Oil accounts for nearly 40% of public revenues and provides a good part of foreign exchange earnings. The government has already announced a 4% reduction in the state budget initially planned for 2015. The allocation of USD 330 million to the construction of the 4G network should go some way to reducing pressure on the state budget over the year. Domestic demand is expected to remain moderate because of budgetary stimulus, but Ecuadorians’ external purchasing power will be greater because of the appreciation of the US dollar. Private investment will still be hit by the slowdown in credit supply, with the banks under numerous regulatory restrictions and prioritising the financing of the public sector. Chinese investment in the mining sector and renewable energy (hydroelectric power stations) made in partnership with the State is expected to slow a little because of budget cuts. The contribution of foreign trade will remain moderate. Although the recovery of the US economy is a positive sign for the country’s exports (45% of exports are to the USA), the appreciation of the US dollar weakens the competitiveness of non-oil exports (bananas, prawns, cocoa, flowers) mainly to Europe.
(e): estimate
Exports of goods, as a % of total dollar. Exports of oil and its derivatives represent over half of the country’s exports and 20% of its imports. Although increased oil production expected for 2016 is favourable to the balance of trade, the lasting drop in prices could limit earnings in the future. Non-oil exports, mainly to Europe, are expected to slow because of the appreciation of the dollar, which weakens the competitiveness of local products. Despite the rise in taxes and customs duties on imports, put in place at the beginning of this year, imports are growing faster than exports because of the weakness of the local manufacturing industry and the rise in household purchasing power resulting from the dollar's appreciation. The balance of services remains in deficit, with freight costs and oil services paid to foreign countries exceeding tourism income. The revenue balance is affected by significant capital outflows and falling FDIs are not enough to fund the current account deficit. The country thus has to borrow from multilateral organisations and China, which has now become the country’s biggest lender.
45%
11%
8% 4%
United States
Eurozone
Chile
Peru
Colombia
Imports of goods, as a % of total
Diplomatic frictions with neighbouring countries on concerning protectionism The over 50% drop in the price per barrel of oil together with the weakening of the Colombian peso and the Peruvian nuevo sol against the US dollar (Ecuador’s currency) have led the government to impose new tariff protection measures against these countries. This decision has provoked a diplomatic row with Colombia and Peru, both of them members of the Andean Community of Nations (ACN), a free-trade association of which Ecuador is a member. This disagreement is expected to hit Ecuadorian value-added exports mainly intended for the ACN market. Moreover, the sudden departure of the Minister of Foreign Affairs, Rivadeneira, an advocate of trade deregulation, worries private sector businesses, concerned about the future return of a protectionist commercial policy. Finally, the government will continue to favour Sino-Ecuadorian relations, China having become the country’s main investor and creditor.
29%
13% 9%
United States
China
Eurozone
8%
Colombia
7%
Panama
Weaknesses
Strengths
Poorly diversified economy, dependent on oil Inadequate infrastructures (roads, dams) and lack of skilled labour ● Oil production stagnating ● History of sovereign default ● Weak domestic and foreign investment ● State interventionism ● Expensive and still poorly developed credit supply ● Opposition of indigenous populations and ecologists to the development of primary resources
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Significant mining, oil and gas potential Imminent energy self-sufficiency thanks to hydro-electricity ● Tourism potential (flora, fauna, cultural heritage) ● Climatic diversity making various forms of agriculture possible ● Marine wealth: world’s biggest exporter of shrimps ● Low public and external debt
10%