Ecuador

Following a decade of relatively high growth (+4.2% on average between 2007 and 2014), Ecuador’s growth decelerated with the fall in oil prices in 2014 as the oil receipts on which Ecuador remains dependent mostly financed public investments. The economy has been fully dollarized since 2000, which anchors inflation expectations and largely reduces transfer and currency risk, but increases the country’s vulnerability to external shocks. The returns on the nation’s bonds topped nearly 30% early in 2022, more than those any other country, according to the Bloomberg Barclays Index. This is the result of a confluence of factors: a steady vaccination campaign, rising oil prices and optimism that President Guillermo Lasso, the first centre-right president in nearly two decades who took office in May 2021, will usher in a wave of market-friendly reforms. In addition, according to a recent Staff Report of IMF, it is likely that the country will successfully complete an IMF programme for the first time after 20 attempts.

Nevertheless, the economic recovery remains modest and recent protests have increased political uncertainty and the number of business disruptions, which worsens Ecuador's economic outlook to a large extent. After moderate growth in 2022, we expect the economy to slow down again in 2023 as inflation and higher interest rates affect private consumption.  In the medium term, we project a weak recovery as the country will struggle to reverse investor sentiment and fiscal space will remain constrained by limited financing options, restricting the ability to increase capital expenditure.

Ecuador ranked 129th in the World Bank’s Ease of Doing Business survey. We expect advanced discussions with the US over a free-trade agreement and the regional trade block (Pacific Alliance), which might positively impact trade. Important shortcomings remain with regard to starting a business, resolving insolvencies and paying taxes. Following the protests in June 2022, President Guillermo Lasso faces a fragmented political landscape and parliament, which may hamper his ability to implement his program. In mid-September, President Lasso announced that he wished to hold a referendum to make several changes to the country's constitution in areas ranging from water conservation to the number of members of parliament (MPs). This reflects the problematic relationship between his administration and the National Assembly (the legislature). Lasso has little support in the legislature and his public approval ratings have been battered by the ongoing surge in violent crime and increases in the cost of living. The referendum process is likely to provide further evidence of the ongoing poor relations between the executive and the legislature.