Country Report Ecuador September 2008

Outlook for 2008-09

• Mr Correa will continue to enact policies to bolster his popularity in the run-up to the September 28th referendum to ratify the constitution, which we expect to be affirmed by a healthy, but lower than originally expected, margin.
• We expect that Ecuador's preferential trade access to the US under the ATPDEA will expire at end-2008, but that it will be renewed by a new US administration some time in 2009.
• 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 assume, oil prices remain historically 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.
• At 2.2% in 2008 and 2% in 2009 the pace of GDP growth will remain unspectacular compared with that of other net oil exporters in the region.
• We expect inflation to end 2008 at 11%, on the back of supply-side pressures and expansionary fiscal policies. On the benign assumption that supply-side pressures ease in 2009, inflation is forecast to fall to 6.6% by year end.
• High oil prices but weaker remittance flows mean that the current-account surplus will reach 5.1% of GDP in 2008 (previously 7.2%). The surplus will drop to 0.3% of GDP in 2009 as oil prices stabilise and remittances decline.

Monthly review

• As the national referendum on the new constitution approaches, Mr Correa's popularity has appeared to bolster the "yes" vote while the "no" campaigners have argued the draft will give Mr Correa dictatorial powers.
• Mr Correa has pledged to begin repaying depositors of Filanbanco, once Ecuador’s biggest bank before its collapse in 1999, with the income from the more than 60 companies seized in August.
• The government and two foreign oil companies, Repsol and Andes Petroleum, have secured deals that would switch their contracts to service provider agreements. Petrobras has agreed to begin contract renegotiations.
• Despite stagnant production, oil export earnings more than doubled in January-June compared with the year-earlier period.
• Remittances inflows, which stood at US$712m in April-June, declined for the second consecutive quarter and represented a 7.7% decrease year on year. Almost 90% of remittances this year have come from the US and Spain.