Country Report Ecuador June 2009

Outlook for 2009-10

• Governing will become more difficult for Mr Correa in the outlook period as the severe deterioration of the economy gradually erodes his popularity.
• MrCorrea 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 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 0.5% in 2010, driven by a partial recovery in oil exports.
• Although our central assumption is that inflation will remain below 7% 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 will record a deficit of 4% GDP in 2009, before easing only slightly to 4.2% of GDP in 2010.

Monthly review

• The national elections council has yet to announce official final results for the national assembly, but Mr Correa has acknowledged that his Alianza Pais party will lose the majority it currently enjoys in the interim legislature.
• The populist PSP, right-wing Partido Cristiano Social, and the PRIAN will form the core of the opposition, with a combined 36 seats of the 124-seat assembly.
• The government has agreed to repurchase its defaulted bonds at 35 cents on the dollar and expects around 90% of bondholders to comply with the deal.
• In response to shrinking credit, the authorities have controversially announced measures to force private banks to repatriate around US$1.2bn of deposits currently held abroad, as well as raising interest rates on credit cards.
• Remittances from workers abroad during the first quarter of 2009 were down 13.9% on the previous quarter and a marked 27% year on year.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52