Ecuador

Ecuador’s economic performance remains shaped by external shocks, structural limitations and governance risks. A recession in 2020 (-7.8%) was followed by a modest recovery, but 2024 saw another substantial contraction (-2.4%) due to unprecedented droughts and energy crises. A recovery of +1.4% is expected in 2025, driven by political stability following President Daniel Noboa’s re-election and prospects of smoother legislative coordination.

Inflation remains subdued in consumer terms (+1.5% y/y in 2024) due to dollarization, but producer prices surged last year, reflecting cost pressures. Dollarization continues to limit monetary policy tools, while liquidity remains a concern, with international reserves ending 2024 at USD6.9bn – covering less than three months of imports. However, remittances totaling a similar amount in 2024 have cushioned domestic consumption.

A historic drought in 2024 exposed the fragility of Ecuador’s hydro-dependent energy matrix, prompting government efforts to revive thermoelectric generation. However, depletion of the Amistad gas field and regulatory obstacles weigh on energy security and investor confidence, while liquefied natural gas imports are set to rise.

The oil price drop poses a fresh challenge as Ecuador relies on oil revenues. A USD10 per barrel decline in oil prices widens the fiscal deficit by an estimated USD500mn (~0.4% of GDP). Financing needs are thus rising at a time of global risk aversion. Market access for Eurobond issuance remains delayed, though multilateral lending could fill the gap – including a likely USD1.3bn IMF RSF program over 2025-2026.

Ecuador’s political and social environment presents critical risks to its economic outlook. Despite gaining 11 places in the 2024 Heritage Foundation’s Index of Economic Freedom, Ecuador ranks below the regional average, reflecting poor rule of law, government integrity and judicial effectiveness. Despite political gains, Ecuador’s governance challenges are acute. The homicide rate, while down to 40 per 100,000 in 2024 (from 47 in 2023), remains high. Criminal networks continue to destabilize regions, with prison riots and targeted violence posing daily threats. Noboa’s militarized response – including plans for maximum-security prisons – evokes regional parallels but faces civil society backlash. Meanwhile, international relations remain fraught, with tensions over border energy exchanges and disputes in the Pacific region. The suspension of electricity imports from Colombia during droughts further underscores the need for domestic energy resilience and heightens security risks.

President Noboa was re-elected in April 2025 after a run-off with Luisa González (Revolución Ciudadana, RC) who he had beaten already in 2023. His Acción Democrática Nacional (ADN) party secured 66 of 151 seats (44%) – a significant improvement from its 10% share in 2023. This stronger base increases the likelihood of forging a working majority in the new Congress, enabling the passage of structural reforms and enhancing governance. RC remains the largest single bloc but with waning momentum. González’s refusal to accept defeat signals continued opposition, but the party risks internal fractures. Electoral fatigue (three consecutive run-off losses), poor debate performance and scandals involving founder Rafael Correa – still influential but politically barred – cast doubt on the party’s ability to expand its base.

While ADN’s legislative position is stronger, it lacks a constitutional majority. Forming a durable coalition with independents and minor parties will be crucial, but unstable. Resistance may arise around fiscal tightening or liberalization efforts. Conversely, RC could seek alliances to build an opposition majority. A broad constitutional reform is among Noboa’s top priorities, aimed at tackling institutional inefficiencies, governance gaps and barriers to investment. Potential reforms include easing labor regulations, enhancing legal protections for private property, international arbitration and reducing state dominance in strategic sectors. However, any move to convene a constitutional assembly could heighten short-term volatility, particularly in markets.

Social unrest risks persist, particularly if economic expectations are unmet or if austerity measures deepen hardship. Energy shortages, high unemployment and gang-related violence will test the administration’s stability and popularity over the 2025-2029 term.