Country Report Ecuador November 2008

Outlook for 2009-10

• After the overwhelming popular ratification of the new constitution, MrCorrea will continue to enact policies to bolster his popularity in the run-up to fresh general elections set to take place in March or April of 2009.
• Given that the opposition remains divided and unpopular and a viable presidential challenger has yet to emerge, we expect that MrCorrea and his Alianza Pais (AP) party will win the elections in 2009.
• Ecuador's preferential trade access to the US under the ATPDEA was renewed for another year, but will face a review in June 2009. The lack of a long-term trade agreement with the US will continue to hinder capital investments.
• 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.
• If, as we are now assuming, oil prices average less than US$85/b in 2009-10, the government will face increased fiscal constraints and struggle to fund ambitious social spending increasing the likelihood of a debt default.
• The pace of GDP growth will be unspectacular in the outlook period (1.8% in 2009 and 2% in 2010) as both domestic and external demand falter.
• On the benign assumption that supply-side pressures ease in 2009, inflation is forecast to fall to an average of 4.9% in 2009-10.
• A decline in remittance flows and lower prices for oil exports mean that the current-account surplus in 2008 (an estimated 4.2% of GDP) will fall into deficits of 2.7% and 1.8% of GDP in 2009 and 2010 respectively.

Monthly review

• As the price of oil drops (down nearly 60% from its peak in mid-July) the fiscal account is coming under pressure. Mr Correa has stated that some infrastructure spending and capital investment may have to be postponed.
• Mr Correa's AP has 45 of the 76 seats in the interim Congress and will drive the legislative agenda. In total there are roughly 54 members that support the president, enhancing governability during the constitutional transition.
• Relations with Brazil were strained in October as Mr Correa expelled a Brazilian engineering company, Oderbrecht, over a contract conflict, and has threatened not to repay a US$240m grant from a Brazilian development bank.
• Ecuador has agreed to accept a cut in its daily OPEC production quota to 493,000 barrels/day (down from 520,000).
• Recently released Central Bank figures show the economy growing by 6.9% and 8.8% year on year in the first and second quarters of 2008, respectively.

This report covers the following industry codes:
SIC Code: 13;49;10;60
NAICS Code: 211;22;212;52