Country Report Ecuador May 2009

Outlook for 2009-10

• Mr Correa won 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.
• Opposition parties performed better than expected in elections and, although they are still fragmented, a larger representation in the new nationalassembly will allow them to have a greater influence on legislation.
• 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 private 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 0.8% 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 will record a deficit of 6% GDP in 2009, before easing only slightly to 5.2% of GDP in 2010.

Monthly review

• Mr Correa won an unprecedented first-round election victory on April 26th, but his 51% support suggests that his popularity has diminished slightly.
• Lucio Gutierrez of the right-wing populist PSP finished second with an unexpected 28%, invigorating his opposition movement.
• Ecuador's proposal to repurchase its defaulted debt at a 70% discount of face value received a mixed reaction from bondholders in late April. The government has since suggested it would consider higher offers.
• Ecuador and China have moved closer to signing a multi-billion dollar deal to invest in energy and infrastructure projects.
• Earnings from oil exports dropped by 67% year on year in January-March, a sharp fall of US$1.8bn compared with the same period of 2008.

Source: Country Report

This report covers the following industry codes:
SIC Code: 47;65;60;37;10
NAICS Code: 48;53;52;336;212