Riding on the back of high oil prices, Ecuador’s trade deficit narrowed in 2011. The administration is now targeting the non-oil trade deficit, which has risen as a percentage of GDP to double figures since 2009, standing at 13% in 2011.
Oil-driven spending continued under President Correa’s administration into 2012, with the re-negotiation of oil contracts in 2010 yielding the government an additional $1.5 billion in revenues. GDP grew 7.8% in 2011 from $55.67 billion in 2010, mainly driven by rising oil prices, yet “public and private investment accounted for 46% of the growth figure,” according to Jeannette Sánchez, Coordinating Minister of Economic Policy Coordination. Indeed, the non-oil sector grew 8.8% thanks to public investment, seen as a boon to the Correa administration’s policy of increased spending in the face of international uncertainty. Oil-fueled spending, however, contributed to an increase in imports of 19.3% in 2011, reaching $23.01 billion, while exports hit $22.29 billion, up 27.4% from the previous year according to the Central Bank of Ecuador (CBE). “Investment in the non-finance public sector will total around $9.7 billion, which is a significant level for an economy of this size,” Sánchez commented, adding, “it represents an important bet on changes to the energy matrix, road network, logistics, and social services infrastructure.”
While the trade deficit thus reduced from $1.98 billion in 2010 to $717.3 million in 2011, the country has some way to go to return to the surpluses it experienced from 2002 to 2008. This trade deficit is partly the result of surging fuel imports worth $7.23 billion, which accounted for 22.3% of total imports in 2011, up from $5.92 billion in 2010. The Refinery of the Pacific is a key part of Ecuador’s plan to turn the trade deficit around by increasing the domestic production of higher value-added petroleum products and reducing its dependence on petroleum imports. The Correa administration was certainly successful, however, in increasing the country’s FDI pull in 2011, closing the year with over $300 million. This is up from a low $164 million in 2010, though there is work to be done to catch up with FDI hotspots Peru and Colombia, which attracted $7.33 billion and $6.76 billion, respectively. The FDI charge will continue in haste, expects the Coordinating Minister of Economic Policy. “Foreign investments are typically allocated toward large strategic projects, and this year we will develop several programs to satisfy the needs of investors,” she said, adding, “we expect a significant increase in foreign investment over the medium term.” Remittances have been much more stable, with Ecuadoreans around the world contributing approximately $650 million to the national economy each year.
Expectations for GDP growth in 2012 remain tight, with growth typically having averaged around the 5% mark for the last decade. The Correa administration is thus staking its bets on stable oil prices and continued exceptional growth rates if economic expansion is to be sustainable. Francisco Rivadeneira, Vice-Minister of Foreign Trade and Economic Integration, remains hopeful, however, stating, “we estimate we’ll be able to grow at a rate of at least 6% a year for the next 10 or 15 years.”
TRADE & INDICATORS
Although the slew of public energy, logistics, and services infrastructure projects has led to an increase in imports, Ecuador’s budget increased by over 8% in 2012, reaching $26 billion. A combination of global commodity price increases and floods in the highland Andes has also driven up food prices, and thus inflation, which was at 4.84% in the 12 months to August 2011, currently stands at a little over 5%. In order to get the economy moving, the Correa administration has championed the protection of domestic industries, ruling out free trade agreements (FTAs) with the EU and the US in favor of more limited agreements to protect smaller-scale producers. It is, however, looking at further integration with MERCOSUR, in which it currently has associate member status and is facing pressure from its agricultural producers to get the ball moving on the EU in order to open the door further for Ecuadorean exports to the trade bloc. Indeed, 31% of Ecuador’s non-oil exports go to the EU, including 20% of all flower exports. The country is also flirting with Turkey in terms of a trade deal, though for Turkey this would likely be in areas where it does not currently have sufficient production. China is also a target for an agreement, but tends to favor full FTAs, and so it is likely that the limits of any trade deal will have to be hammered out between the parties.
Ecuador’s trade year was dominated by crude oil exports, which at the end of 1H2011 totaled $5.65 billion, followed by bananas at $1.25 billion, shrimp at $563 million, oil products at $491 million, and flowers at $360 million. In terms of imports over the same period, raw materials led the way at $2.84 billion, with capital goods at $2.23 billion, and consumer goods at $1.72 billion, according to Market Watch.
Ecuador has become one of the most open economies in the region under the current administration, with the ratio of imports and exports to GDP rising to 68.7%, overtaking Chile’s 61.9%, according to Analytica Investments.
During a re-signing of oil contracts in 2010, the government bet on increasing oil prices and signed a deal with oil producers, applying a profit ceiling of $32 per barrel. With prices rising to $103 over 2011, the administration watched its coffers swell by an additional $1.5 billion. While only 12 of 17 investors signed up to the new terms, those that stayed on “are now planning to invest a further $1.4 billion over the next three years,” Wilson Pástor, Minister of Non-Renewable Natural Resources, told TBY. State-owned Petroecuador’s budget has also swollen in order to slow a decline in output and prevent a drop in exports. The Refinery of the Pacific is seen as key in boosting the country’s refining capability, along with an upgrade of the aging Esmeraldas Refinery and an expansion of the Shushufindi Refinery. It is hoped investment in such infrastructure will move the country’s carbon products up the value chain, both bringing in more petrodollars and lowering the country’s reliance on fuel imports, rebalancing the current account.
In addition to its traditional sectors, Ecuador is also pinning hope on its emerging mining industry. “We have now discovered significant reserves of gold, copper, and other important metals like titanium and silicon,” said the Vice-Minister of Foreign Trade and Economic Integration, “and [we] are looking for foreign investors to come in from different areas of the world, such as Australia, South Africa, Canada, Europe, and the US, so we can develop that sector.” Challenges remain, however, to get things moving in a sector that is still dominated by small-scale activity. Negotiations with Canadian mining giant Kinross are also continuing, with its proposal to develop the Fruta del Norte gold mine, valued at $1 billion, awaiting approvals. As mining has been seen as a potential new major source of revenue for the country, getting the licensing and regulatory environment right will be key for further investment.
While FDI increased to $300 million in 2011 from $164 million in 2010, Ecuador has a much work to do to improve its attractiveness. Yet, it is hoping it has set the scene for growth and has pinned much hope on the recently enacted Code of Production. It includes “incentives for new industries, innovations, and people who want to invest in the country,” Santiago León, Minister of Production, Employment and Competitiveness, told TBY, adding, “one of the most important aspects of the code is the tool to guarantee FDI.”
Multilateral organizations also provide a significant amount of Ecuador’s foreign investment, including the Inter-American Development Bank (IDB), the La Caixa Foundation (FLAC), and the Latin American Development Bank (CAF). “We are also cooperating with China and other friendly countries, though multilateral organizations will likely be the most important sources,” León added. Ecuador is looking for added investment in its non-oil sectors, including the banana, coffee, cocoa, and flower industries, in order to address the trade balance. “We work toward designing policies that inspire the private sector to take the investment leap,” León concluded. While the Ecuadorean economy has seen some major changes over the past decade, with a more robust consumer segment, further growth will still depend on Ecuador developing its global trading profile.
© The Business Year