Country Report Ecuador April 2009

Outlook for 2009-10

• The president, Rafael Correa of Alianza Pais, will win re-election in the first round of voting on April 26th, but the severe deterioration of the economy in 2009-10 will gradually erode his popularity, threatening his hold on power.
• The opposition remains divided and unpopular, but some candidates and parties willdo well, reducing the majority of Alianza Pais in the new nationalassembly.
• The lack of a long-term trade agreement with the US, poor judicial security, complex bureaucracy and uncertainties surrounding the implementation of the constitution will continue to hinder investment.
• State intervention in the economy, which is a key aspect of the new constitution, will increase during the outlook period, particularly in "strategic" areas such as energy, banking and telecommunications.
• The debt default will make it difficult to attract fiscal and external financing in the outlook period. This, combined with reduced inflows of US dollars from oil and low reserve levels, poses the risk of a collapse of dollarisation.
• The economy, which has become increasingly reliant on oil-backed government spending, will weaken sharply, contracting by 4% in 2009, before growing by just 1% in 2010, driven by a partial recovery in oil exports.
• Although our central assumption is that inflation will ease in 2009 owing to base effects and declining demand, heterodox economic policies (particularly import restrictions) present a risk to our forecast.
• A sharp decline in oil export revenue and workers' remittances means that the current-account deficit will widen to 6% of GDP in 2009, before easing only slightly to 5% of GDP in 2010.

Monthly review

• If he is able to win more than 40% support in the first round of voting on April 26th, MrCorrea will be the first president to win re-election since 1972.
• Despite MrCorrea's popularity, a survey published in late March showed that Alianza Pais will find it more difficult to secure an outright majority in the new assembly than previously thought.
• The debt restructuring plan involving the global 2012 and 2030 bonds is expected to be unveiled on April 20th.
• According to recent figures spending rose by 71% in 2008, pushing the NFPS accounts into a US$260m overall deficitthe first since 1999.
• Following a sharp drop in export earnings of 46.7% in January, the trade balance recorded a deficit for the fifth consecutive month.

Source: Country Report