Ecuador Infrastructure Report Q4 2009

In BMI's Q409 Ecuador Infrastructure Report we are forecasting construction industry value to contract by 1% y-o-y to reach a value of US$5.62bn. Ecuador's infrastructure sector continues to be in a state of turmoil, and therefore we continue to place risks to the downside.

Based on revised data from the Banco Central del Ecuador for the construction industry value between 2006 and 2008, we have also revised our data for this time frame. Although this has reduced the bank's estimate for 2008 from 17.8% to 13.8%, BMI believes risks are still to the downside, as the final quarter of 2008 especially saw a drop off in construction activity.

Our 2009 forecast has also been revised down, and we are now expecting the industry to contract y-o-y. This figure is based on both BMI data and preliminary forecasts for the year from the Banco Central del Ecuador, which also estimates a 1% contraction. Despite a downward revision, risks are still to the downside as there is little cause for optimism in the industry, at least for the short term.

The utilities sector provided perhaps the largest source of optimism on activity. However, there was little that translates into concrete activity. A number of tenders for power plants are planned to be launched by the end of the year or are currently open for bidding; however, it remains to be seen how much interest will be garnered.

Developments in the transport sector have further rattled the country's business environment, which is already severely dented following the issues with Odebrecht and Hutchinson Port Holdings (see market overview for more details). With regards to the latter, the Manta Port Concession debacle finally came to a close in July 2009 following an agreement between HPH and the government that saw HPH transfer all rights to the port to the Manta Port Authority. The government is planning to reconcession the port and upgrade it. The latest group of companies to be hit by the unstable business environment was the Quiport consortium, formed of US, Canadian and Brazilian companies, which won a concession for Quito's Mariscal Sucre International Airport in 2002 including a contract to build a new international airport for the capital. In August, however, the major of Quito announced that his office was looking into renegotiating the terms of the contract. Finally, the Guangxi Road and Bridge Engineering Corporation faced the threat that it will be struck off the list of companies that the state will hire following continued delays in the construction of a bridge in Guayaquil.

The Ecuadorian government's tough stance on construction companies has impacted on several contracts, included those listed above, with a number terminated. The prominence of these issues, illustrated in our new and ongoing projects section, will undoubtedly be a cause for concern for companies looking to get involved in the country. This has fed through into our Infrastructure Business Environment Ratings, with Ecuador placing second to last (behind Venezuela) in the Americas region, with a score of 40 out of 100.

A further blow to the country's business environment has resulted from the country's voluntary defaulting on international loans, which has all but dried up external sources of financing, although investments from China still appear to be forthcoming as do those from the Andean Development Corporation. As such the majority of the responsibility has fallen to the government to support infrastructure development.

While the newly re-elected President Rafael Correa has made commitments to do so, BMI is concerned, with oil revenues declining, that there will be much less money in the pot. In addition, the economic climate is also in decline, and BMI believes the country will enter into recession in 2009 (-2.1% real GDP growth), which will get deeper in 2010 (-5.5%).