12 January 2023

Country Economic Forecast | Ecuador

Stagnant outlook as crucial reforms are postponed

◼ We have downgraded our 2023 GDP growth forecast for Ecuador by 1.1ppt to 2.4%. The mark
down is due to slowing private consumption as high inflation has dented household’s purchase
power since last year. The country's ongoing fiscal reforms will also cap growth. Moreover, risks
are tilted to the downside due to a likely economic slowdown in Ecuador's main trading partners,
the US and China, which account for 40% of the export basket. On the domestic side, though
President Lasso survived an impeachment attempt last year, political feuds with the opposition
persist.

◼ Ecuador successfully completed the Extended Fund Facility program with the IMF worth
US$6,500mn the sixth and last revision concluded in December. The IMF board stated that all
quantitative performance criteria were met due to higher oil prices and expenditure restrictions
in 2022. Yet, two critical improvements are still pending. First, Ecuador's access to international
financial markets is likely to take another year due to persistently high spreads. Second, the fuel
subsidy reform, suspended since late 2021, is unlikely to resume this year due to its political cost.

◼ In line with our latest Debt Sustainability Analysis for Ecuador, public finances are still in decent
shape, but there's potential for a new IMF program in the medium term as authorities will
continue with fiscal consolidation reforms. Finance Minister, Pablo Arosemena, stated that more
than 50% of Ecuador's financing needs will be covered through multilateral funds this year, which
should give the authorities time to decide whether to pursue a new deal in 2023-2024.

◼ Headline inflation closed 2022 at 3.7% y/y, a seven-year peak. By categories, food and beverages
was the main driver for last year's result, as Ecuador is a dollarized economy and most of the
inflationary pressures came through imported items. As inflation peaked in Q2 2022, we forecast
a gradual easing to 2.4% by the end of this year.

Table 1: Ecuador forecast overview

(Annual percentage changes unless specified)
2020 2021 2022 2023 2024 2025
GDP -7.8 4.2 2.9 2.4 3.3 2.4
Domestic demand -10.1 7.8 3.7 1.3 3.0 2.4
Private consumption -8.2 10.2 4.0 0.7 2.0 2.1
Fixed investment -19.1 4.4 2.6 3.1 3.1 2.6
Government consumption -5.1 -1.7 2.3 3.7 3.6 3.4
Exports of goods and services -5.4 -0.1 0.3 3.7 2.6 2.3
Imports of goods and services -13.8 13.2 3.7 -0.3 1.4 2.0
Industrial production -10.0 0.5 4.2 2.4 2.6 2.2
Unemployment rate (%) 8.4 5.2 4.4 4.2 4.8 5.1
Government balance (% of GDP) -7.2 -1.7 0.8 1.0 0.8 1.0
Gross government debt (% of GDP) 63.6 58.6 56.5 54.2 51.6 49.5
Current a/c balance (% of GDP) 4.6 2.9 2.3 2.6 3.2 2.9
Consumer prices -0.3 0.1 3.5 2.8 2.0 2.0
Cen. bank policy rate (%, AVG) 0.2 0.2 0.2 0.2 0.2 0.2
Exchange rate (US$ per US$, EOP) 1.0 1.0 1.0 1.0 1.0 1.0
Source: Oxford Economics

Debora Reyna - Latam Economist - dreyna@oxfordeconomics.com

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 Stagnant outlook as crucial reforms are postponed

Forecast overview boost fiscal incomes by 1ppt until 2025. Yet,

downside risks persist as the opposition could
Recent developments tackle the tax reform if a new political feud looms
between Congress and President Lasso.
In Q3 2022, Ecuador's GDP growth jumped to
1.7% q/q as economic activities normalized after Chart 2: GDP is below pre-pandemic levels
the nationwide protests in June. Net exports and Ecuador: GDP recovery
private consumption contributed to 1.1ppt of the Index (2019 Q4 = 100), s.a.
115
quarter's growth. We estimate the economy grew Forecast
110
by 2.9% in 2022 (Chart 1).
105

Chart 1: Net exports supported growth in Q2 100

2022 95

Ecuador: Contributions to growth Ecuador World

90
% q/q, Q3 2022
LatAm6
GDP 1.7 85

80
Net Exports 0.6
2019 2020 2021 2022 2023 2024 2025

Privt. Consumption 0.5

Stockbuilding 0.3
Investment 0.2
Govt. Consumption 0.1
0.0 0.5
Source: Oxford Economics/Haver Analytics
Short-term outlook
We have cut our 2023 GDP growth forecast by
1.1ppt to 2.4% due to a slowing private
consumption and a weaker external demand.
Moreover, Ecuador's economic performance has
stayed well below its LatAm peers and is only
expected to recover to pre-pandemic levels by
the end of year. Sluggish growth and fragile
consumption point to a moderate growth rate of
2.8% on average for 2023-2025. (Chart 2)
Key drivers of our short-term forecast
For the first time in 20 years, Ecuador
successfully concluded an IMF deal. According
Source: Oxford Economics
International access to financial markets will
take another year. The EMBI has jumped by
400bps since April 2021 when President Lasso
won the elections, indicating that Ecuador is still
1.0 1.5 2.0
in a fragile position for investors. More positively,
external financing needs have narrowed for the
next few years after the successful restructuring
of debt owed to China, providing $1.4bn in debt
service relief until 2027. According to the Finance
Minister, Pablo Arosemena, more than half of the
financial needs of 2023 are covered by
multilaterals loans. (Chart 3)
Chart 3: Half of external financing needs this
year are covered by multilateral funds
Ecuador: External financing
% of GDP
Foreign direct investment
7
Current account Forecast
6 Portfolio financing gap
5
4
3
2
1

to the last revision, the board stated that all 0

-1
quantitative performance criteria were met on
-2
the back of higher oil prices and expenditure -3
restrictions in 2022. Still, we think the country will 2011 2013 2015 2017 2019 2021 2023 2025

deliver a fiscal consolidation worth 4.3 ppts of

GDP in 2020-2025. Half of it has been achieved
so far, backed by expenditure measures. In
particular, the Public Sector Wage Bill is expected
to increase fiscal savings by 1.8ppts by capping
the nominal growth wage for public servants. On
the revenues side, the tax reform is expected to
Source : Oxford Economics
Resuming the fuel subsidy reform will be one
of Ecuador's biggest challenges. The reform
was suspended in 2021 due to growing social
unrest that triggered a backtrack under the

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 Stagnant outlook as crucial reforms are postponed

current administration. Authorities have failed to Source : Oxford Economics/Haver Analytics

resume the reform due to its elevated political
Slower household consumption. In 2022, a
cost, and as they lack support in Congress.
spike in international prices was triggered by the
We estimate that in 2022, fuel subsidies had a Russia-Ukraine war, hitting Ecuador's households
total cost of 3.5% of GDP and for 2023 the cost purchasing power through imported items. As
could be around 2.5% of GDP. However, the prices take longer to converge and due to the
longer authorities take to resume the reform, the ongoing fiscal reform, we expect private
bigger the threat on fiscal sustainability in the consumption to grow moderately in 2023.
medium term. (Chart 4)
Inflation will keep slowing gradually in 2023.
Chart 4: Fuel subsidies costs reached an eight- Consumer prices grew 3.7% y/y in 2022 due to
year peak in 2022 as oil prices soared food prices as imported items became pricier. We
Ecuador: Fuel subsidies expect inflation to fall to 2.4% by the end of the
% of GDP
8
year as pressures are gradually waning. (Chart 6).
IMF Requirement
Additional expenditure estimated
7
Chart 6: Consumer prices peaked in 2022 and
6 Forecast
now are on a downward trend
5
Ecuador: Consumer prices
4 y/y% F'cast
5
3
4
2
3
1

0 2
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
1

Source: Oxford Economics/Haver Analytics 0

The ambitious goal to reach 1mn barrels/day

-1

of oil production by 2025 seems unlikely. As of -2

2015 2016 2017 2018 2019 2020 2021 2022 2023
November of 2022, Ecuador oil production
averaged 479,000 b/d, below the year's target of Source: Oxford Economics/Haver Analytics
526,000b/d, and persistently below pre-pandemic
levels. Delays with environmental licenses, power
outages, and blockades by indigenous
communities are also on the back of this result
and we don’t expect a significant turnaround in
the short-term. Consequently, Ecuador's oil
production will remain subdued in 2023. (Chart
5).

Chart 5: Ecuador's oil industry remains stagnant

Ecuador: Daily oil production
Thousand barrels
2019 strikes
560
Oil production
Coronavirus crisis
2019 levels
540

520
2022
Coca river strikes
pipeline spills
500

480

460
Aug-18 Jan-20 Jun-21 Nov-22

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 Stagnant outlook as crucial reforms are postponed

Economic risk
Economic risk evaluation Market demand: 7.0/10

Overall risk for Ecuador: 5.3/10* Domestic demand remains subdued even after
the easing of pandemic-related restrictions and
Ecuador's overall economic risk score is 5.3 and should recover to its pre-pandemic level only this
has slightly deteriorated since July. Despite a new year, underperforming its LatAm peers. The IMF
wave of social unrest in 2022, we expect disbursement of US$1.2bn in 2022 enabled the
authorities to maintain a market-friendly stance. government to continue to reduce its arrears with
the domestic private sector and improve liquidity.
GDP growth is expected to average 1.3% per year Notably, authorities concluded the latest IMF
between 2020-2025, weaker than in the previous program for the first time in 20 years.
decade. The recovery from the 2015-2016
recession was relatively swift, with GDP Market cost: 5.0/10
surpassing its previous peak at the end of 2017.
But fiscal consolidation efforts weighed on Market cost risks are moderately low in Ecuador,
growth in 2018 and 2019 and will continue to in a dollarized economy. The lagged impact of the
the medium term. The coronavirus pandemic US dollar appreciation during 2014-2016 and
took a toll on economic growth in 2020, and the depressed domestic demand pushed the
country is struggling to recover to its previous economy into deflation between September 2017
levels. In addition, business conditions remain and August 2018. A second period of deflation
challenging despite the administration efforts to began in July 2020 due to the pandemic. Annual
implement reforms under the guidance of the inflation turned positive again in Q3 2021 and
IMF. We don't rule out protests and strikes as spiked in H1 2022 due to higher international
Lasso's government seeks to reduce its wage bill prices. We expect inflation to remain near 2.2%
and increase non-oil revenues, which could affect on average until year-end 2025 amid weak
economic activity. domestic demand. Despite low inflation, relative
labour costs are high, especially in the public
Chart 7: Ecuador fares well among EMs sector, due to a large wage premium.
Economic risk: Ecuador vs Emerging markets average
Venezuela
Argentina
Puerto Rico 5
Russia
El Salvador
Turkey
Paraguay
Brazil
Ecuador
Bolivia
Uruguay
S Africa Emerging Markets Average
Colombia
Mexico
Panama
Chile
Peru
US
0 2 4 6 8 10

Table 2: Economic Risk Index

Jan 2023 (Scores Score change from Rank out of 164 (1=
from 1 to 10 with July lowest)
10 = highest risk)
Overall 5.3 0.1 73
Market demand 7.0 0.0 121
Market cost 5.0 0.0 64
Exchange rate 2.8 0.2 37
Sovereign credit 4.5 0.0 65
Trade credit 7.0 0.0 69
Source: Oxford Economics

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 Stagnant outlook as crucial reforms are postponed

Exchange rate: 2.8/10
The exchange rate risk score of 2.8 is low
considering the country is fully dollarized. We
think Ecuador's economy will remain fully
Chart 8: Market demand risk is the only score
above the emerging markets average
Economic risk: Ecuador vs Emerging markets average
Market demand
10

dollarized over the forecast horizon. The risk of 8

6
tighter capital account restrictions is relatively Trade credit
4
Market cost
low as the approval of an IMF program and 2
0
restructuring of sovereign debt make the external
financing needs manageable. One of the main
goals of the IMF program is to strengthen Exchange rate Sovereign credit

dollarization by accumulating international Emerging markets average Ecuador Ecuador 6 months ago

reserves, reducing the fiscal deficit (and debt),

and improving the country’s competitiveness to
counter the relative strength of the US dollar. An Source : Oxford Economics
improved business environment should also spur
FDI and help the country sustain a modest
current account deficit in the long term. * Risk scores are from 1 to 10, with 10
representing the highest risk. For our full country
Sovereign credit: 4.5/10
risk service, see http://www.risk-evaluator.com/.
The sovereign credit risk score is 4.5, ranking Sovereign credit risk comes from our sovereign
Ecuador 58th out of 164 countries in the risk tool, and foreign exchange risk comes from
category. In our system, Ecuador’s score is our FX tool. Find out more.
undermined by a history of defaults, elevated
external debt levels, and worries about external
imbalances, which are particularly threatening
due to the dollarized economy and its low level
of FX reserves. However, the successful Eurobond
restructuring undertaken in 2020 has greatly
reduced debt-servicing costs and improved debt
sustainability. The government is aiming to
reduce the debt-to-GDP ratio to below 45% by
2030. To achieve this, it will have to further
reduce expenditures or subsidies as well as raise
taxes.

Trade credit: 7.0/10

The trade credit risk score captures the default

risk of private sector firms, influenced by broad
country-level economic and financial conditions.
The score is currently at 7.0, and we expect it to
remain high due to Ecuador's small, open, and
fully dollarized economy with insufficient
reserves.

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 Stagnant outlook as crucial reforms are postponed

Background
Economic development and structure of the economy
The economy’s export base is traditionally agricultural. Ecuador remains the biggest exporter of bananas to
the EU, with shrimp and cut flowers also important sources of revenue. But successive new oil discoveries
allowed oil to emerge as the main export. Oil-related operations boosted industrial production to around
15% of GDP, with the agricultural sector under 10%. Oil output reached 536,000 b/d in 2006, making
Ecuador the fifth-largest Latin American producer, but it has since declined, especially after some foreign oil
companies pulled out of the country in response to a new oil contract regime in 2010. Output was 486,000
b/d at the end of 2010 but rose to average 500,000 b/d in 2011 and 504,000 b/d in 2012. Oil taxes are a key
source of government revenue, allowing other tax rates to be kept down. State operations now control
around three-quarters of all oil production.

After successive inflationary episodes that triggered sharp devaluations of the sucre currency, circulation of
the US dollar was legalised in 2000. The dollarisation regime continues and subjects Ecuador to US levels of
monetary discipline, improving control over inflation. The banking system, whose collapse in 1999 hastened
the switch to the US dollar, subsequently returned to profit, assisted by the arrival and expansion of foreign
banks. While US interest rates were slashed after the onset of the credit crunch, Ecuador’s inflation rose to
10% before easing to 5.2% in 2009 and 3.3% in 2010. However, food and oil price pressures lifted the rate
to 5.4% at year-end 2011. While dollarisation brought stability to the economy, the political situation
remained turbulent, with a rapid succession of presidents prior to Rafael Correa, few of whom finished their
allotted four-year term. Elections in late-2006 saw Correa elected as president, the country’s eighth
president since 1996, backed by his Alianza Pais (AP) grouping. Correa implemented constitutional changes
to help improve political stability and social welfare and extended presidential term limits. He was re-
elected with enhanced powers during the general elections held in April 2009 and secured victory again in
February 2013.

Policy and politics

Corruption and incompetent action by past presidents were often the proximate cause of their removal
from office, while underlying political tensions have arisen from the sense of deprivation and political
exclusion widely held in the indigenous community. Indigenous peoples comprise about 25% of the
population and those of mixed Indian and European descent account for another 60%-65%. These groups
are disproportionately represented among the landless rural and marginal urban workforces as a result of
colonial landholding patterns and traditionally unbalanced educational opportunities. Coordinated protests
by indigenous groups were a factor in most of the insurrections that triggered changes of government
since 1979 when democracy displaced military rule.

Presidencies in the recent past bowed to popular pressure for state social and economic intervention or
followed a tougher pro-market route until conflicting with a more electorally sensitive Congress. Prior to
Correa, President Alfredo Palacio, although ostensibly a technocrat, was widely accused of giving in to
pressure from trade unions and social movements representing indigenous and lower-income households.
His populist actions, including the appropriation of Occidental Oil, the largest foreign investor, and the
withdrawal from negotiations on a free trade deal with the US opened the way for Correa to win the
November 2006 election on a platform of more state control of natural resources and improved external
debt terms to finance social spending and job creation.

External debt continued to rise after dollarization despite growing oil revenues, and when oil prices
collapsed in H2 2008, the government again partially defaulted on $3.2bn of external debt in December
that year, calling for fairer terms. Subsequently, a series of manoeuvres involving bond buybacks helped
reduce public foreign debt, which stood at $12.5bn in September 2013 with another $8.7bn of internal
public debt. In June 2009, the country joined the Bolivarian Alliance with Venezuela and Bolivia. Relations

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 Stagnant outlook as crucial reforms are postponed

with Colombia deteriorated after an attack on a FARC guerrilla camp in Ecuador in March 2008. Efforts to
resume diplomatic links with the Santos administration since August 2010 have borne fruit, although
border incursions of FARC guerrillas raised tensions again in March-April 2013. A thaw in US relations
began but suffered a setback in 2011, with Ecuador’s dismissal of the US ambassador after reports revealed
by Wikileaks. In August 2012, Correa granted Wikileaks founder Julian Assange political asylum in its
London embassy to halt Assange’s extradition to Sweden amid speculation he would be sent to face
charges in the US. Lenín Moreno was elected President in May 2017, but despite being from Correa’s AP
party, he broke with his party’s hard-left tradition and was willing to work with the opposition to re-
establish the country’s fiscal sustainability. In May 2021, Guillermo Lasso, a right-wing candidate, took office
and began the first departure from Correismo in 14 years as Ecuador seeks to recover access to
international markets.

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