Country Report Ecuador September 2009

Outlook for 2009-10

• Governing will become more difficult for Mr Correa in the outlook period as economic deterioration and corruption erode the government's popularity.
• Mr Correa's AP will have to seek alliances with small far-left parties after it lost its majority in the national assembly. This will lead to a further radicalisation of policy, raising tensions with opposition groups.
• 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.
• An unfriendly policy environment, weak property rights, poor relations with the US and complex bureaucracy will continue to hinder private investment
• The government will face fiscal deficits in the outlook period, increasing the risks of social and economic unrest, including the collapse of dollarisation.
• The economy, which has become more reliant on government spending, will weaken sharply, contracting by 3.1% in 2009, before growing by just 1.5% in 2010, driven by a partial recovery of domestic demand and higher oil prices.
• A sharp decline in oil export revenue and workers' remittances will push the current account into deficits of 2% and 0.7% of GDP in 2009 and 2010, respectively. Severe weakening of import spending will prevent larger deficits.

Monthly review

• Mr Correa was sworn in for a renewed four-year term under the new constitution, promising to fight against new forms of economic and political colonialism.
• The ruling AP is planning to create a large number of citizens' committees, as in Cuba and Venezuela, with the purpose of defending against a possible (albeit unlikely) coup against Mr Correa.
• Relations with Colombia remain poor as regional tensions escalate owing to a US-Colombia military agreement and as disputes over trade tariffs continue.
• The government is pushing forward with a new tax reform to close its growing fiscal deficit. The reforms are targeted primarily at the private sector.
• In response to falling revenue, the authorities have secured financing of up to? US$4.7bn from a number of sources, including a possible new deal with? China.
• Inflation fell for the third consecutive quarter, with an annual rate of 3.8% in? July.