Rizikové faktory a výhľad

  • President Moreno is facing a strained political situation, which is likely to become tenser in the run-up to the 2021 general elections.
  • The announced fiscal consolidation is of paramount importance in tackling the ballooning and elevated public debt.
  • Elevated external debt service is leaving the country vulnerable to tightening of global financial conditions.
  • A financing package from multilateral organisations will support the Ecuadorian economy and liquidity position in the coming years.

Fakty & Čísla

Pozitíva

  • Abundance of natural resources
  • President Moreno’s commitment to structural reforms
  • Relatively secure country compared to its Latin American peers
  • Current-account surpluses on the cards as of 2019

Negatíva

  • Lack of economic diversification
  • Exposure to altering conditions on the financial markets
  • Elevated external debt and debt service ratios vis-à-vis current-account receipts
  • Weak public finances

Head of state

  • President Moreno

Population

  • 16.6 million

GDP in 2018

  • USD 107.5 billion

Income per capita (2017)

  • USD 5,890

Income group

  • Upper middle income

Hodnotenie rizikovosti krajiny

Political power play between the current and former presidents putting a strain on the political situation

President Moreno, who has been in office for 2 years now, is trying to break away from the previous administration of Rafael Correa. Correa, a left-wing populist, ruled the country for a decade (2006-2016), before presenting Moreno as his successor. Indeed, Moreno and Correa were previously on good terms, as also illustrated by Moreno’s vice-presidency under Correa (2007-2013). However, after Moreno was (narrowly) elected as the new president, he started to distance himself from Correa and his policies. Consequently, the ruling party (Alianza PAIS (AP)) has since suffered internal divisions. The defection of about 30 AP legislators to the Citizens’ Revolution, a political movement created by Correa, has even removed the government’s majority and it now relies on the support of the opposition. The rift widened further when in February 2018 a referendum set two-term limits for presidents, which disallowed Correa’s return and strengthened Moreno’s mandate. It is expected that the political situation will remain strained in the coming years. The main reasons are Moreno’s corruption crackdown against prominent members of the former administration and the arrest warrant for Correa over his alleged involvement in the 2012 kidnapping of an opponent. Moreover, it is likely that the ongoing power play between Moreno and Correa – and therefore the risk of political instability – will intensify in the run-up to the 2021 general elections.

Ecuador likely to fall into recession again this year

Ecuador has been suffering from historical low oil prices since 2014 as the oil sector represents about 10% of total GDP and slightly less than 30% of current-account receipts. Furthermore, since 2000 the economy has been fully dollarised. However, the rising USD in combination with Ecuador’s decreasing competitiveness since wages have increased faster than productivity, is an important headwind for the economy. These factors and the ongoing fiscal consolidation are likely to push the economy into a minor recession this year, with real GDP growth likely to reach roughly -0.5%. This would be the second recession in 3 years, as in 2016 GDP growth contracted by 1.2% after a devastating earthquake. In the next few years, GDP growth is expected to remain rather low (0.2% in 2020 and 1.2% in 2021) due to structural weaknesses (e.g. a difficult business environment) and ongoing fiscal consolidation. Diversification away from the oil sector and increasing competitiveness, for example through the incorporation of technology or better infrastructure, will be important for stimulating economic growth in the medium to long term.

One of Moreno’s priorities is therefore to restore business confidence and attract investment, especially in the underdeveloped mining sector, which accounted for roughly 5% of current-account receipts in 2017. Indeed, the Andean country is counting on FDI to boost the economy. Policy choices under the previous administration of Correa eroded trust: a sovereign debt default in 2008, the withdrawal from the International Centre for Settlement of Investment Disputes in 2009, oil sector nationalisation in 2014 and the cancellation of bilateral investment treaties in 2017. These events also explain the high expropriation risk (6/7). Although Moreno is trying to reverse course (e.g. by signing a comprehensive economic partnership agreement with the European Free Trade Association), FDI inflows are only slowly picking up (FDI stood at just 0.9% of GDP in 2018).

A financing package from multilateral organisations will support the Ecuadorian economy and liquidity position

A series of loan deals should also help breathe life into Ecuador’s sluggish economy. In February 2019, Moreno secured loan deals worth USD 10.2 billion. The agreements include a USD 4.2 billion deal with the IMF and USD 6 billion worth of loans from institutions such as the World Bank, the Andean Development Corporation and the Inter-American Development Bank. Besides creating breathing room for the economy, the loan deals will boost the liquidity position and support dollarisation over the next few years. Indeed, the country has a low level of foreign-exchange reserves (covering just 1 month of imports in February ’19). Depletion of foreign-exchange reserves in the Ecuadoran context of full dollarisation would mean a liquidity crunch, which could in turn inspire the government to impose import or capital controls.

Further austerity drive necessary to tackle the ballooning public debt

Public finances were already deteriorating when oil prices were booming, mainly due to the doubling of public expenditure under Correa. The oil price drop in mid-2014 obviously caused public finances to deteriorate further as the oil sector was an important source of government revenue. Hence, the fiscal deficit rose quickly and peaked at a high level of -8.2% of GDP in 2016 when reconstruction costs following the April 2016 earthquake put additional pressure on government finances. Public debt also shot up, mainly as externally held debt increased significantly. Public debt more than doubled over five years to 46.1% of GDP at the end of 2018 (from 20% of GDP at the end of 2013). As a consequence, interest payments vastly increased and currently stand at the highest level for a decade. In recent years, Moreno has pursued fiscal consolidation and in combination with rising oil prices this has led to a declining fiscal deficit. Indeed, the fiscal deficit in 2018 was estimated at -0.9% of GDP, a relatively low level. Also in the coming years, Moreno will be committed to fiscal austerity – especially since it is a linchpin in the IMF programme attached to the IMF loan, which is expected to turn the fiscal balance into surplus as of 2020 while a zero deficit is expected this year. As a consequence, public debt is expected to peak at the end of 2019 at 49.2% of GDP, an elevated level for the country, before gradually declining.

It will likely be challenging for the government to implement its austerity plans – especially as the inflow of Venezuelans escaping the crisis at home may create additional pressures – and protests are likely to rise. Nevertheless, fiscal consolidation will be of paramount importance in the coming years given the conditions specific to Ecuador. First and foremost, full dollarisation of the economy means that government deficits cannot be monetised or this risks putting the dollarisation framework in jeopardy (as happened under Correa). Second, even though China has in recent years proved to be a reliable source of funding for Ecuador, credit conditions on these loans may tighten to reflect the Chinese economic slowdown as well as increased global risk aversion. Third, access to international capital markets is not easy – despite being less difficult than in previous years – as the markets are aware of the fiscal and economic challenges the country faces while the memory of the sovereign default of 2008 illustrates that Ecuadoran willingness to pay is not unconditional. Indeed, external financing is costly for the country. Lastly, fiscal consolidation is crucial for the IMF programme: missing targets in this context could cut off Ecuador from its “cheap” loans (vis-à-vis market borrowing).

History of tariffs and import restrictions to tackle the current-account deficit

The current-account balance has been a key issue in Ecuador since dollarisation. Indeed, in a context of full dollarisation, current-account deficits could lead to a liquidity crunch, especially since the country has a limited amount of foreign-exchange reserves. After the oil price fell in 2014, the current-account balance quickly deteriorated as oil revenues accounted for about half of current-account receipts. The Correa administration responded by introducing “safeguard” tariffs and import restrictions, which led to a sharp fall in imports as of 2015. Nevertheless, in 2015, the current-account deficit reached -2.2% of GDP, a five-year low, but quickly recovered to a surplus of 1.3% of GDP in 2016 as imports were further squeezed. Only in the second half of 2017 were temporary import tariffs removed. In 2017 and 2018, the current-account balance recorded a small deficit (-0.4 % and -0.7% of GDP respectively) but as of 2019 the current-account balance is expected to remain in the black. From a small surplus in 2019 of 0.4%, the current account is projected to increase to comfortable surpluses of around 1.5% of GDP in the coming years. The main reasons are rising export revenues (mainly oil) and the improved fiscal position. Nevertheless, new import restrictions cannot be completely excluded in the event of a sudden trade shock (e.g. rising protectionism, oil price drop, significant slowdown in GDP growth in the USA or China) or difficulties in financing current-account deficits (e.g. tightening of global financial conditions).

Elevated debt service leaving the country vulnerable to tightening of global financial conditions

Fiscal and current-account deficits have been pushing up external debt. At the end of 2018, total external liabilities stood at around 40% of GDP, still a moderate level, but double the level of 5 years ago (close to 20% of GDP in 2013). Looking at the debt ratio vis-à-vis current-account receipts, the debt trend looks even more alarming. According to the World Bank, external debt stood at roughly 180% of current-account receipts at the end of 2017, an elevated level and triple the level of 5 years ago (about 60% of current-account receipts in 2012). Nevertheless, external debt is likely to peak at less than 45% of GDP in the coming years before gradually declining in the long term while external debt vis-à-vis current-account receipts is already on the mend due to increasing current-account receipts. Also, the short-term external debt to current-account receipts ratio rose by more than 60% from 2011 to about 18% of total current-account receipts in June 2018, although this is still a rather low level for the country. Furthermore, the rise in external debt ratios has led to an increase in the total external debt service. According to World Bank data, in 2017 Ecuador spent about 30% of its current-account receipts on servicing its external debt compared to around 10% in 2011. Indeed, debt service vis-à-vis current-account receipts tripled. Furthermore, debt service is expected to remain elevated in the medium term and Ecuador is facing important debt repayments in the coming years. This leaves the country vulnerable to sudden stops in its access to external capital markets.

Credendo classifies Ecuador in short-term political risk category 4/7 with a stable outlook. The country enjoys a low level of external short-term debt, although foreign-exchange reserves are also low. Nevertheless, the financing package from multilateral organisations will support the liquidity position in the short term. The medium-/long-term political risk is in category 6/7 with a stable outlook. Ecuador’s high risk rating reflects its elevated external debt and debt service ratios vis-à-vis current-account receipts, weak public finances, the strained political situation, vulnerability to tightening of the financial conditions and the country’s economic lack of diversification despite expected current-account surpluses.

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com