Feb. 1, 2015
Since President Correa took office, he has promoted a program of high public spending, for which Ecuador's return to the international markets following default in 2008 is especially significant amid concerns that the Andean nation had become too reliant on Chinese funding. Elsewhere, a July 2014 deal with the EU to guarantee continued preferential access to the bloc provided cause for celebration among exporters, and particularly banana producers, and secures a destination for at least $3.5 billion worth of Ecuadorean goods.
According to the Wall Street Journal, Ecuador's economy grew 4.5% in in 2013, above the government target of 4.05%, but below the 5.1% clocked the previous year. Services dominate the economy, at 50.2%, with industry representing 39.9% and agriculture the remaining 9.9%. And while oil export revenues continue to account for over one-third of government revenues, it is the non-oil sector that was the star of 2013, growing 4.9% compared to the hydrocarbon sector's 1.4%
The fiscal deficit remains a key concern, however, and stood at 4% of GDP at end-2013. For end-2014, the government expects a fiscal deficit of some $5 billion, with $7.26 billion earmarked for public investment over the year. And it is in this context that Ecuador's return to the international markets, in June 2014, is so significant; the country sold $2 billion in 10-year bonds at a yield of 7.95%, according to the Finance Ministry, in a move that heralded the welcoming back of the IMF and an unofficial recognition that the economy had become too reliant on Chinese liquidity. Indeed, since 2009 Chinese funding to Ecuador has reached $12 billion, a trend that began following the 2008 default.
In other indicators, GDP per capita stoodat $5,943 as of end-2013, up from $5,637 in 2012 and $5,226 in 2011. In trade terms, Ecuador displayed a dramatic turnaround in 1H2014, posting a surplus of $483 million for the first five months on the back of export growth—in the same period the year before there was a deficit of $626 million, the country going on to post a balance of negative $1.4 billion for year-to-November 2013. Aside from policies that have introduced quality controls for imported products and supported domestic industry, PRO ECUADOR, under the Ministry of International Trade, seeks to boost the country's trade profile and attract FDI, with $476.7 million of the latter hauled in in 2013, up 41.1% in 2012. Approximately 80% of foreign investment is made in the oil sector, in spite of the fact that the private sector represents just 25% of the strategic oil sector.
But despite some positive cash flows, current account deficit (CAD) worries continue, the gap standing at 1.3% of GDP as of end-2013. It was the announcement that a new digital currency, the sucre, would be launched in October 2014, which caused surprise, the government seemingly hoping that it could help to fund the deficit. For use alongside the US dollar, and if implemented properly, the sucre, the first ever digital currency to be backed by a national government, has the chance to surprise. That said, some observers maintain concerns that it could create inflationary pressure when coupled with the fiscal deficit.
In 2013, inflation ended the year on 2.7% in CPI annual variation terms, the lowest in eight years. In other good news, the National Institute of Statistics and Census (INEC) reported unemployment of 3.91% in June 2013, the lowest rate in Latin America. And according to the Ministry of Planning and National Development (Senplades), full employment exceeded underemployment for the first time, at 52% and 43%, respectively. According to Focus Economics, the unemployment rate ended the year on 4.7%.
MIND THE GAP
In 2008, Ecuador defaulted on $3.2 billion in global bonds, buying back 93% of the sum at 35 cents on the dollar a year later. The development severely limited the country's access to the capital markets and allowed China to capitalize on the country's new liquidity shortfall by offering up attractive financing in return for a supply of crude oil. But in 2014, Ecuador made its return to the international markets, selling $2 billion in 10-year bonds at a yield of 7.95%. According to the Finance Ministry, demand was in excess of $5 billion and among the over 200 participants were institutional investors and private banks in the US, Asia, Europe, and South America. The additional liquidity will help Ecuador continue its program of high public investment, with $7.26 billion having been earmarked for investment in 2014 alone out of a total spending budget of $34.4 billion. Between 2007, when Correa came to power, and 2013, public investment totaled $34 billion, a staggering figure considering that just $6 billion was invested in the preceding eight years. The country's return to the international bond market, in that respect, also represents a diversification in fund sourcing, many having warned that Ecuador had become too reliant on China for loans. With the Far Eastern giant having invested $12 billion since 2009, it is prudent of the authorities to seek alternative funding to hedge against a drop in global oil prices, a wave upon which Ecuador has become accustomed to riding.
The headline trade news for 2014 was the signing of a pact with the EU to allow Ecuadorean exporters continued preferential access to markets in the bloc. Signed in July, Ecuador came within months of the end of a previous deal, which was set to expire in 2015. The deal, affecting a number of goods including shrimp, canned tuna, and oil, revolved primarily around bananas, with the EU wanting a guarantee that Ecuador would not flood the market and create problems for the bloc's other trade partners. In response, Ecuador agreed to the triggering of a tariff on bananas should an annually established limit be reached. In 2013, Ecuador's exports to the EU totaled $3.5 billion, with $630 million in banana exports. In the same year, the country imported goods worth $2.9 billion from the EU.
In other trade news, 1H2014 was full of good news for Ecuador following a disappointing 2013, when the country posted a trade deficit of $1.4 billion in the year to November. However, the introduction of new quality controls on imported goods and government support for domestic industry, as well as higher oil revenues, led to the turnaround in 2014. For the January-May period, Ecuador posted a surplus of $483 million, with exports up 9% and imports down 2% YoY, according to the Central Bank. Exports were worth $11.1 billion over the period, while imports were worth $10.61 billion. The about-face can also be somewhat attributable to a program of import substitution, and the import of a number of goods, including those deemed harmful to public health as well as those that could be produced domestically, has been restricted. But it was oil that really did the trick, leading exports to the tune of $5.74 billion over the period, followed by bananas at $1.12 billion, shrimp at $1.09 billion, and flowers at $344.31 million. In non-oil terms for January-May, the balance came in at negative $2.76 billion, while the oil sector posted a surplus of $3.25 billion.
Ecuador has done much to ease the concerns of spectators over 2014, taking bold steps to diversify the government's funding basket, while closing a trade deal with the EU that will be a huge relief to exporters both small and large. Heading into the future, it is yet to be seen for how long President Correa's penchant for public investment can last, but with a number of large projects drawing to a close, including the Refinery of the Pacific, the seeds of investment could be about to bear fruit.