Country Report Ecuador January 2009

Outlook for 2009-10

• MrCorrea will continue to enact policies to bolster his popularity in the run-up to general elections in April 2009, which we expect him to win, but severe economic deterioration could threaten his hold on power later in 2009-10.
• The opposition remains divided and unpopular and will not gain many seats outside its bastion of support in Guayaquil, but calls for regional autonomy may increase in the outlook period as support for Mr Correa declines.
• Ecuador's preferential trade access to the US under the ATPDEA faces another review in June 2009. The lack of a long-term trade agreement with the US, along with other policy uncertainties, will continue to hinder investment.
• State intervention in the economy is a key aspect of the new constitution and 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 the funds needed to finance government spending in the outlook period. This, combined with lower dollar inflows from oil, will increase the risk of the collapse of dollarisation.
• As conditions worsen, the Ecuadorean economy, which has become reliant on oil and government spending, will weaken significantly, contracting by 3.2% in 2009 (previously 1.6% growth), before growing by 2.3% in 2010.
• Inflation will ease in 2009-10 as base effects, a stabilisation of food prices and declining demand begin to lower the annual rate.
• A heavy decline in oil export revenue and workers' remittances means that the current account will fall into deficit, of 4.2% and 2.6% of GDP (previously 3.3% and 1.7%) in 2009 and 2010 respectively.

Monthly review

• The president, Rafael Correa's decision in December to default on US$3.2bn of Ecuador's global bonds, despite having the ability to pay, has angered foreign investors, but has proven popular domestically.
• Government reserves have dropped by US$1.3bn since end-October fuelling speculation that the government has been using reserves to repurchase its sovereign debt as a strategy to reduce the bargaining power of bondholders.
• High oil revenue in 2008 has supported a 70% increase in fiscal spending and a US$2.6bn surplus in January-September. However, a large deficit and sharp spending reduction are expected for 2009 as oil revenue plummets.
• Selective tax changes will provide tax benefits to firms that reinvest profits and support productive sectors and raise taxes on capital outflows and banking assets held abroad.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49;60;39;1
NAICS Code: 22;52;31;11

This report covers the following industry codes:
SIC Code: 49;60;39;1
NAICS Code: 22;52;31;11