Country Report Ecuador July 2009

Outlook for 2009-10

• Governing will become more difficult for Mr Correa in the outlook period as the economic deterioration and corruption allegations erode his popularity.
• Mr? Correa will have to settle for an unwieldy legislative coalition that will depend on votes from both far-left and centre-left parties. This will raise political tensions and delay the passage of the more contentious bills.
• An unfriendly policy environment, weak property rights, poor relations with the US and complex bureaucracy will continue to hinder private investment.
• Even in the face of opposition, state intervention in the economy, as enshrined in the new constitution, will increase, particularly in "strategic" areas, such as energy, mining, banking and telecommunications.
• The December sovereign default will compound the difficulties in meeting fiscal financing needs. This, combined with reduced inflows of US dollars from exports and fewer reserves, poses the risk of a collapse of dollarisation.
• The economy, which has become more reliant on oil-backed government spending, will weaken sharply, contracting by 3.6% in 2009, before growing by just 0.5% in 2010, driven by a partial recovery in domestic demand.
• Our central assumption is that inflation will stabilise, averaging 5.5% in 2009-10, owing mainly to declining demand, although heterodox economic policies (particularly import restrictions) present a risk to our forecast.
• A sharp decline in oil export revenue and workers' remittances will push the current account into deficits of 4.4% and 4% of GDP in 2009 and 2010, respectively. Severe weakening of import spending will prevent larger deficits.

Monthly review

• A hardline policy toward private media and charges of nepotism are at the centre of a rift within Mr Correa's Alianza Pais (AP) party.
• As expected AP will form the largest bloc in the new National Assembly but has lost its absolute majority by four seats, meaning Mr Correa will have to rely on smaller leftist parties to pass legislation.
• After lauding the successful default and repurchase of its Global 2012 and 2030 bonds Mr Correa has suggested that he now plans to review the debt contracted with multilateral agencies including the World Bank, IMF and IDB.
• Prices for Ecuador's oil exports rose by 85% between January and May but total production is at record lows as private production is declining sharply.
• Total oil export revenue fell by 63.4% year on year in January-May, reflecting lower production but also average prices which were nearly 60% lower than the year-earlier period.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37;49;60;53;59;48;2834;80;1;70
NAICS Code: 336;22;52;44;517;3254;62;11;72