Fear about Ecuador’s liquidity position as a result of detrimental external dynamics has been translated into the country’s 2-notche downgrade. First, with oil until recently representing more than 30% of government revenues and more than 40% of foreign exchange receipts, low oil prices have exacerbated Ecuador’s twin deficit. The government balance moved from being break-even in 2011 to showing a deficit of 5.4% of GDP in 2014. Doubts moreover prevail about the feasibility of reining in the budget shortfall in the years ahead. The current account deficit amounted to 0.6 % of GDP in 2014, but is estimated to have grown to 2.6% in 2015. Second, because the Ecuadoran economy is fully dollarised, the strength of the US currency will hurt international competitiveness. Third, because investor and financial market confidence in Ecuador remains limited, there is a significant downside risk related to FDI and capital inflows. If these turn out lower than expected, the resulting financing gap could result in a liquidity crunch, which could in turn inspire the government to impose import or capital controls.
04 Jun 2020
Ecuador: Trying to handle the double shock caused by covid-19 and low oil prices
Trying to handle the double shock