Country Report Ecuador July 2008

Outlook for 2008-09

• Rising inflation will pose an increasing threat to Mr Correa's high approval ratings; however, it will be difficult for the now-suspended Congress to unseat the president, as it has done several times in the past decade.
• Mr Correa’s anti-American rhetoric and close friendship with Venezuela’s president, Hugo Chavez, will sustain tensions in the relationship with the US, Ecuador’s main trading partner.
• State intervention in the economy will increase further during the outlook period, particularly in “strategic” areas, such as energy, banking and telecommunications.
• If, as we assume, oil prices remain high, the government will have the resources to increase social spending without jeopardising scheduled repayments, but a sharp decline in prices could prompt a debt default.
• Averaging 1.8% per year in 2008-09, the pace of GDP growth will remain unspectacular compared with that of other net oil exporters in the region.
• We now expect inflation to rise above 10% in 2008 on the back of stronger supply-side pressures and an increasingly expansionary fiscal policy, ending the year at 11.1% (previously 7.5%).
• Higher than expected oil prices will increase the current-account surplus to 7.2% of GDP (previously 4.6%), even as oil production stagnates and import demand remains strong.

Monthly review

• The government seized 195 businesses run by the Isaias group owing to a dispute over debts stemming from the 1998 banking crisis. Respected finance minister, Fausto Ortiz, resigned after disagreeing with the seizure.
• With a July 26th final deadline looming, Ecuador’s constitutional assembly is engaged in a flurry of activity although hundreds of the 530 planned articles still remain to be passed before a final assembly vote.
• Annual inflation continued to rise in June, reaching 9.7% on the back of food and beverage prices, which have risen 20% year on year.
• The government has made a new offer to private oil companies and has backtracked on some of their original revenue share demands.
• Economic performance in the first quarter of 2008 is replicating the poor results of 2007 and has led the government to adjust this year's GDP growth projections downward from 4.0% to 3.1%.
• In January-May 2008 the trade balance reached a large surplus of US$2bn and export earnings increased 64% year on year as oil prices rose to record highs.

Source: Country Report