country reports -ecuador

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Country Reports - Ecuador

2 Mar 2015 IHS Economics and Country Risk

Our take

Key pointsConstitutional Court ruling to allow legislature to vote on presidential re-election reforms increases the likelihood of Rafael Correa remaining in powerbeyond 2017.The convergence of protest issues is likely to increase levels of civil unrest in 2015.Growth is expected to remain mild in the upcoming quarters, amid a contraction in crude oil prices.A preferential trade agreement between Ecuador and the European Union will improve access for Ecuadorian and European goods in each other'smarkets.

AnalysisSix-Factor Country Risk - Ecuador

Risk Score Description

Political 3.25 SIGNIFICANT

Economic 3.75 HIGH

Legal 3.75 HIGH

Tax 3.50 HIGH

Operational 3.75 HIGH

Security 2.75 MEDIUM

Overall 3.50 HIGH

12-Month Rating Trend Positive Trend

Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of enhanced Country Analysis & Forecast suite of services.

Sovereign Risk Ratings - Ecuador

Medium-Term 60(B-) Very High Payments Risk

Sovereign Risk Outlook Stable

Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of enhanced Economic and Sovereign Risk services.

Constitutional Court ruling to allow legislature to vote on presidential re-election reforms increases the likelihood of Raphael Correa remaining inpower beyond 2017. On 31 October 2014, the court ruled that a package of constitutional amendments, including the elimination of term limits for electedofficials, could be voted on by the legislature rather than the public through referendum. Given the ruling Country Alliance (Alianza País: AP)'s dominance ofthe legislature with 100 of 137 seats, the amendment package is likely to be passed at some stage in 2015. The opposition has strongly criticised the move butits attempts to challenge the legality of the reform package, as well as the way it is to be approved, have so far failed.

The convergence of protest issues is likely to increase levels of civil unrest in 2015. On 19 November 2014, thousands of protesters representing labourand civil society groups demonstrated in cities across the country over issues including the government’s planned labour code reform. The protests occurred ina period of increasingly organised opposition to President Rafael Correa's administration over issues including a new water law, the decision to exploit oilreserves in the Yasuní national park, and constitutional reform plans,

Growth is expected to remain mild in the upcoming quarters, amid a contraction in crude oil prices. Correa's administration has realised that anydevelopment efforts should include the private sector. The context for doing business seems to be improving, although risks of expropriation have increased inspecific sectors. At IHS we forecast GDP to slow in the near term, mainly driven by falling crude oil prices, before accelerating into the medium term. Weanticipate the economy to grow in the neighbourhood of 1.6% in 2015 and to expand at around 3.1% over the medium term as the domestic and globaloutlooks improve.

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A preferential trade agreement between Ecuador and the European Union will improve access for Ecuadorian and European goods in each other'smarkets. On 12 December 2014, Ecuador and the EU signed a preferential trade agreement, with ratification expected in 2015. For Ecuador, the agreementwill improve market access for its principal exports to the EU, particularly fish and seafood, flowers, fruits, and cocoa while protecting Ecuador from competitionthat could damage sensitive sectors, particularly agriculture. EU exporters expected to benefit from better access to the Ecuadorian market include theautomotive, beverage, and professional service sectors.

Forecast summaryMild growth is anticipated in the upcoming quarters amid the worst commodity bear market since the 1980s. After over six years in power, companiesand households are used to President Correa’s political style and mistakes, planning accordingly for the long term as this administration has successfully wonre-election in 2013. Businesses, particularly those dealing with the government, are making huge gains, while households are profiting from high liquidity in theeconomy and better access to credit. The outlook has improved because the government no longer faces important financing challenges and large publicdeficits in the short term; current-account deficits are forecast to remain in the neighborhood of 1.3% of GDP in the medium term. On the external front, thegradual global economic recovery poses some uncertainties amid a correction in commodity prices. Crude-oil markets remain oversupplied, and we expect theprice to decline to an average of USD40 per barrel in the second quarter. Volatility will remain high. Ecuador’s GDP is expected to grow in the neighborhood of3.1% over the medium term, following a deceleration in 2015 mainly driven by lower crude-oil prices.

Mining might support the economy in the post-oil era. The government of President Correa is trying to prepare Ecuador for the post-oil era. Investments inthe oil sector are limited, with state participation increasing at the expense of shrinking participation of multinational companies. No improvements are expectedafter a new contracting framework has been agreed, one that changes from burden sharing to service providers, making the activity less appealing forinvestors. As a result, Ecuador's proven oil reserves and output are likely to decrease in the medium term, putting government and external accounts at highrisk. For that reason, the government has created the legal framework for the mining industry, giving large participation to the state as the owner of the naturalresources, and wants to minimize the environmental impact of mining activities. It is still to be seen if foreign companies are willing to accept high taxation andthe precarious operating conditions offered in Ecuador, along with the high risk of expropriation and social unrest in protests for potential water pollution. Thedevelopment of this sector, however, might well be the future for the country.

Fiscal deficits will be contained in the short term as Ecuador diversifies its sources of financing. Lack of access to the financial markets, together withconstrained liquidity among local investors, suggests that country allies are the only financing sources available. An aggressive fiscal expansion fueled by largesubsidies and high wage compensations for public workers has propelled large deficits. While large investment projects remain in the pipeline, including dams,refineries, airports, and further renovations in the highway system, China remains Ecuador’s main source of financing. Instead of looking for private partners tojoin efforts for these projects as investors, the government has raised money with new debt. In addition, all domestic debt raised comes from social securityfunds, which have become the largest lender at subsidized interest rates, creating actuarial problems for the long term.

Changes since last forecast February interim forecast versus January interim forecast

GDP DOWN Our forecast on GDP growth in 2014 has been adjusted down to below 3.6% from 3.8%, based on the latest available

national accounts and economic activity data. Growth is anticipated to slide further in 2015 to 1.6% amid a forecast large

drop in crude oil prices.

Consumer price

inflation

DOWN We have reduced our 2015 forecast from 3.6% to 3.5%, based on current CPI data and the performance of commodity

prices. Inflation is anticipated to fall slightly in 2015.

Unemployment

rate

DOWN Ecuador’s unemployment rate is forecast in the neighborhood of 4.9% for 2015, according to recent labor-market data.

Current-account

deficit

UP IHS anticipates Ecuador’s current-account deficit to widen to 2.1% of GDP in 2015, driven by contracting exports that will

be partially compensated by savings in the energy bill.

Selected data and charts: Data (forecasts)Political summary

Presidential elections Next contest: 2017 February; Last contest: 17 February 2013.

Legislative elections (Lower chamber) Next contest: 2017 February; Last contest: 17 February 2013.

President: Rafael Correa Delgado (since 15 January 2007)

Vice President: Jorge Glas Espinel (since 24 May 2013)

National Secretary for Communication: Fernando Alvarado Espinel (since 6 July 2009)

Source: IHS and CIRCA People in Power

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Key Macro-Economic Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 7.9 5.2 4.6 3.3 1.6 2.9 2.8 3.4 3.6

Nominal GDP (US$ bil.) 79.3 87.6 94.5 100.8 106.3 112.9 120.1 128.9 139.0

Nominal GDP Per Capita (US$) 5,200 5,656 6,003 6,304 6,551 6,854 7,189 7,606 8,090

Consumer Price Index (% change) 4.5 5.1 2.7 3.6 3.4 3.6 3.7 3.8 4.1

Exchange Rate (LCU/US$, end of period) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from detailedSource:forecast bank (WES).

Country risk - overall statement

OverallEcuador presents a moderate risk for foreign investment. Particular areas of weakness include economic, legal, and operational risks, largely due to thegovernment's tendency towards protectionist policies and resource nationalism, and its partial default on its sovereign debt obligations in 2008. Operationalrisks are likely to further deteriorate if the government decides to withdraw from its remaining bilateral investment treaties as President Rafael Correa haspreviously threatened. In December 2014, Ecuador signed a preferential trade agreement with the European Union, providing greater market access for EUcompanies in certain sectors including automotive parts, beverages, and professional services. That said, infrastructure development has improvedconsiderably under Correa. Ecuador performs marginally better in taxation risks, although this remains high compared to the regional average. In relation topolitical risks, Ecuador is improving. Correa's re-election in February 2013 signalled a continuation of one of the most politically stable periods in the country'shistory. However, the weakness of opposition parties, which collectively control 37 of 137 seats in the National Assembly, is likely to reduce the level ofeffective oversight on government policies and encourage extra-parliamentary protest. In the February 2014 local elections, Correa’s Country Alliance (AlianzaPaís: AP) lost control of the capital Quito and the city of Cuenca, while opposition mayor Jaime Nebot retained the country's commercial capital, Guayaquil.Although the elections proved a symbolic defeat for Correa, they have not undermined his government’s ability to implement policy. Ecuador performs best interms of security risks, largely due to the lack of homegrown terrorist or insurgency groups, although the country does provide shelter to Colombian criminalsand transnational crime organisations that use the country as an illicit drug export hub. Record levels of cocaine seizures in 2013 and 2014 suggest this risk isgrowing, although the high levels of violence typically associated with drug activity are yet to fully materialise. On the contrary, murder rates have beenconsistently falling in the country.

Economic: Country risk statementThe major risk for the Ecuadorian economy comes from the dependence of its public accounts on oil prices, subject to large swings, which were aggravated bya lack of diverse financing sources and an aggressive fiscal expansion implemented without considering long-needed structural reforms in the recent past. Newfinancing sources have been secured, with the successful placement of a bond. Under the current fiscal management, the country's oil and tax revenues arenot enough to finance current expenditures. The external sector is highly dependent on oil revenues, while the non-oil economy has shown signs of dynamism.Important changes to the overall legal system, the new constitution, and the concentration of power in President Rafael Correa's cabinet have limited theamount of domestic and foreign investments. Conditions have improved as the government builds bridges with the investment community—both local andforeign—, after having realized that any development effort should include the private sector. The dollarization regime requires strong fiscal and externalbalances, as well as a sound financial system. The first two continue to stay unbalanced, though, while the financial sector could be the target of additionalregulation. President Correa has apparently understood that his permanence in office is strongly linked to the dollarization regime, which brought some degreeof economic stability to the country in 2000. In the IHS planning scenario, growth dynamics of Ecuador’s main trading partners show some improvement. TheEcuadorian economy is expected to grow in the neighborhood of 3.1% on average into the medium term (2016–18), following a deceleration mainly driven bythe drop in international crude oil prices. In the external context, we will continue to observe the effects of the worst commodity bear market since the 1980s,strengthened deflationary forces, and increased volatility in financial markets.

Short-term outlook

Key points

Mild growth is anticipated in the upcoming quarters amid the worst commodity bear market since the 1980s.Mining might support the economy in the post-oil era.

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Fiscal deficits will be contained in the short term as Ecuador diversifies its sources of financing.

Analysis

Mild growth is anticipated in the upcoming quarters amid the worst commodity bear market since the 1980s. After over six years in power, companiesand households are used to President Correa’s political style and mistakes, planning accordingly for the long term as this administration has successfully wonre-election in 2013. Businesses, particularly those dealing with the government, are making huge gains, while households are profiting from high liquidity in theeconomy and better access to credit. The outlook has improved because the government no longer faces important financing challenges and large publicdeficits in the short term; current-account deficits are forecast to remain in the neighborhood of 1.3% of GDP in the medium term. On the external front, thegradual global economic recovery poses some uncertainties amid a correction in commodity prices. Crude-oil markets remain oversupplied, and we expect theprice to decline to an average of USD40 per barrel in the second quarter. Volatility will remain high. Ecuador’s GDP is expected to grow in the neighborhood of3.1% over the medium term, following a deceleration in 2015 mainly driven by lower crude-oil prices.

Mining might support the economy in the post-oil era. The government of President Correa is trying to prepare Ecuador for the post-oil era. Investments inthe oil sector are limited, with state participation increasing at the expense of shrinking participation of multinational companies. No improvements are expectedafter a new contracting framework has been agreed, one that changes from burden sharing to service providers, making the activity less appealing forinvestors. As a result, Ecuador's proven oil reserves and output are likely to decrease in the medium term, putting government and external accounts at highrisk. For that reason, the government has created the legal framework for the mining industry, giving large participation to the state as the owner of the naturalresources, and wants to minimize the environmental impact of mining activities. It is still to be seen if foreign companies are willing to accept high taxation andthe precarious operating conditions offered in Ecuador, along with the high risk of expropriation and social unrest in protests for potential water pollution. Thedevelopment of this sector, however, might well be the future for the country.

Fiscal deficits will be contained in the short term as Ecuador diversifies its sources of financing. Lack of access to the financial markets, together withconstrained liquidity among local investors, suggests that country allies are the only financing sources available. An aggressive fiscal expansion fueled by largesubsidies and high wage compensations for public workers has propelled large deficits. While large investment projects remain in the pipeline, including dams,refineries, airports, and further renovations in the highway system, China remains Ecuador’s main source of financing. Instead of looking for private partners tojoin efforts for these projects as investors, the government has raised money with new debt. In addition, all domestic debt raised comes from social securityfunds, which have become the largest lender at subsidized interest rates, creating actuarial problems for the long term.

Assumptions

President Rafael Correa maintains moderate levels of popularity, using his veto power to change bills at will.President Correa’s administration successfully maintains the dollarization regime in the long term.Public accounts tend to move into positive territory with proper financing by commercial partners and multilateral sources in the medium term.The government returns to the financial markets with additional debt placements and is able to expand its financing sources.Growth in the United States—Ecuador’s main export destination—is expected to pick up in the medium term, benefiting Ecuador’s export revenues.

Changes since last forecast February interim forecast versus January interim forecast

GDP DOWN Our forecast on GDP growth in 2014 has been adjusted down to below 3.6% from 3.8%, based on the latest available

national accounts and economic activity data. Growth is anticipated to slide further in 2015 to 1.6% amid a forecast large

drop in crude oil prices.

Consumer price

inflation

DOWN We have reduced our 2015 forecast from 3.6% to 3.5%, based on current CPI data and the performance of commodity

prices. Inflation is anticipated to fall slightly in 2015.

Unemployment

rate

DOWN Ecuador’s unemployment rate is forecast in the neighborhood of 4.9% for 2015, according to recent labor-market data.

Current-account

deficit

UP IHS anticipates Ecuador’s current-account deficit to widen to 2.1% of GDP in 2015, driven by contracting exports that will

be partially compensated by savings in the energy bill.

Alternative scenarios

Amid dropping crude-oil prices, President Rafael Correa’s administration starts a process of nationalization of the main industries in the country, similarto Venezuela's initiatives.The return of private oil production to the government has devastating effects on oil output. The government lacks the resources to jumpstart production,and the decline accelerates, affecting public and external accounts. The companies signing new contracts do not invest more than originally agreed;private output thus continues to decline.Inadequate policymaking affects the mining industry as well, the alternative source of foreign-exchange earnings for the government. Foreign directinvestment in the mining sector remains bounded.

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Alternatively, private oil companies that decide to stay invest intensively in exploration. Output stabilizes and then recovers, with the governmentcollecting most of the profits. While oil prices remain relatively high and oil-related taxes and royalties keep flowing in, the government maintains thedollarization in place.Some of Ecuador’s main exports losing free-tariff access to the United States hurt local companies and the labor market, affecting external accounts.

Data

Key Macro-Economic Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 7.9 5.2 4.6 3.3 1.6 2.9 2.8 3.4 3.6




Fiscal Balance (% of GDP) -0.6 -2.0 -4.3 -5.0 -5.6 -2.6 -0.8 -0.8 0.2

Population (mil.) 15.25 15.49 15.74 15.98 16.23 16.47 16.71 16.94 17.18

Unemployment Rate (%) 6.0 4.9 4.7 5.1 4.9 4.6 5.0 4.8 4.7

Current Account Balance (% of GDP) -0.4 -0.4 -1.4 -2.3 -2.1 -1.4 -1.1 -1.4 -1.5

BOP Exports of Goods US$bn 23.1 24.6 25.7 26.9 21.5 23.0 25.1 27.9 29.3

BOP Imports of Goods US$bn 23.2 24.5 26.2 26.3 24.1 25.1 26.8 29.9 33.0


Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th ofSource:each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Medium- and long-term outlook

Key points

The Ecuadorian economy remains very susceptible to external shocks.This excessive concentration in one single sector is aggravated by the amount of proven oil reserves.Survival under a dollarization regime requires at least fiscal responsibility and a sound financial system.The dollarization framework imposes an important constraint on export-oriented sectors, as competitiveness no longer comes from devaluations of thelocal currency, but rather from productivity gains.

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Analysis

The Ecuadorian economy remains very susceptible to external shocks. The oil sector represents about 10% of total GDP, generating around 26% of totalgovernment revenues and 52% of the country’s exports. Therefore, a significant correction in oil prices has the potential to have a major effect on governmentfinances and external accounts. The government still has a positive oil-production balance (exporting more crude oil than it imports oil derivatives), butaddressing the policy of subsidies on domestic sales of oil derivatives and the large amounts that are being smuggled to neighboring countries will becomecompulsory for the central administration. This issue—labeled as populist—requires strong political support and has important political implications. The failureto address it in other countries in the region suggests that President Correa is unlikely to cut subsidies during his presidential term.

This excessive concentration in one single sector is aggravated by the amount of proven oil reserves. This persistent decline will affect the overalleconomy unless the government creates an adequate legal framework for private companies, which are currently operating under a one-year contract that hasnaturally contained further investments. Moving from the burden-sharing contracting framework to one as service providers is not expected to generate therequired investments to increase oil-proven reserves in the short term. Alternatively, new sectors need to be developed, particularly mining, although the legalframework for its exploitation is still missing. Depending too much on a capital-intensive sector has also affected the labor market in Ecuador. Any expansion inthe hydrocarbons industry does not require a major expansion in payroll, meaning that any spillover effect into other industries has taken longer to kick in andshould come from the government’s distributive efforts and investment. Therefore, we do not foresee major reductions in the unemployment rate in the nearfuture.

Survival under a dollarization regime requires at least fiscal responsibility and a sound financial system. The country lacks both a lender of last resortand the possibility of issuing its own currency to finance public expenditures. Since 2003, unlike other countries in a similar position, governments haveincreased public current expenditures without any control and surpassed all limits imposed by the law instead of saving during the time of high oil prices orinvesting most of those resources in human capital, infrastructure development, or debt buybacks. The situation deteriorated under the Correa administrationup to 2009. Financial institutions have clearly recovered from the crisis that halved the system in 1999. Nevertheless, they depend on high interest rates andlarge fees to stay alive, precisely the two main variables revised by law and set by the government since 2008. While large banks' liquidity is the only hopeavailable for the authorities to cover the fiscal imbalance, there is no regulation that would force financial institutions to place their holdings in public debt. Thissituation can easily change given the government muscle in the Legislative Assembly. A new period of financial instability cannot be ruled out in the longerterm, an element that would make dollarization unsustainable.

The dollarization framework imposes an important constraint on export-oriented sectors, as competitiveness no longer comes from devaluations ofthe local currency, but rather from productivity gains. Low levels of competitiveness also affect productive sectors supplying domestic consumers becauseaffordable foreign products are imported, destroying local industries. Lower exports and higher imports—together with limited inflows of foreign investment,both direct and portfolio—are real threats to the balance of payments and therefore do not support the dollarization regime. Globalization and marketintegration require higher productivity to compete, which depends on the incorporation of technology in the production process, better infrastructure, plantequipment, and highly trained human capital. All of these require investment. In IHS’s opinion, Ecuador has not done enough to strongly attract additionaldomestic and foreign investment, and our medium- to long-term forecast clearly reflects this weakness. In addition, the government does not have theopportunity to devaluate—or allow the market to devaluate—its local currency to reduce trade imbalances and generate competitiveness gains, as hasoccurred in other countries in the region. Exporters tend to regain some competitiveness as the US dollar weakens relative to major US trading partners’currencies.

Growth

GDP

Key points

Mild economic growth is expected in the upcoming quarters before GDP accelerates into the medium term.Mining might become the new source of public funds.

Analysis

Mild economic growth is expected in the upcoming quarters before GDP accelerates into the medium term. Domestic and foreign companies operatingin the country had postponed investment plans during the multiple electoral processes and the pseudo-stability that followed. The government's maneuveringcapacity is limited by negative fiscal balances. Ecuador has been able to resort to China and other multilateral sources for financial aid, though. This conditionis expected to continue in the medium term. Household consumption should remain moderate in the upcoming quarters amid improvements in the labor marketand available lending from the financial sector. The expansion observed in domestic demand needs to be matched by imports since local supply is still lagging,the expected result after years of underinvestment. The global economy’s slow recovery poses some uncertainties about the dynamics of Ecuador’s growthtrend in the upcoming quarters. We will continue to observe the effects of the worst commodity bear market since the 1980s, strengthened deflationary forces,and increased volatility in financial markets. At IHS, we expect GDP to expand around 3.1% over the medium term, following growth in the neighborhood of1.6% in 2015.

Mining might become the new source of public funds. Ecuador is the only country in the Andean region with a completely underdeveloped mining sector.To jump-start the industry, the government has recently passed new legislation to improve the legal framework for both local and foreign investors (a lawregulating the use of water is still pending). Although it is not yet clear if massive investments will arrive into Ecuador, we anticipate previous initiatives to

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continue operations, with increases in mining output expected after 2015. The government, on the other hand, will have an effective mechanism to raise moneythanks to high taxation and royalties to be charged to existing and new players. The key variables to guarantee economic growth and income distribution arepublic expenditure and investment. Only the efficient use of public funds in activities with the highest social return will make a difference for Ecuadorians.

Data

Economic Growth Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 5.2 4.6 3.3 1.6 2.9 2.8 3.4 3.6

Real Consumer Spending (% change) 2.7 3.2 3.7 1.9 2.2 2.2 3.4 3.1

Real Government Consumption (% change) 11.1 7.7 1.6 4.0 3.7 3.9 3.8 3.9

Real Fixed Capital Formation (% change) 10.6 10.7 5.4 5.1 5.9 5.3 4.3 4.3

Real Exports of Goods and Services (% change) 4.7 2.4 4.1 3.2 3.0 3.0 3.4 3.8

Real Imports of Goods and Services (% change) 0.8 7.0 5.1 4.0 3.3 3.6 3.1 3.1

Nominal GDP (US$ bil.) 87.6 94.5 100.8 106.3 112.9 120.1 128.9 139.0

Nominal GDP Per Capita (US$) 5,656 6,003 6,304 6,551 6,854 7,189 7,606 8,090


Inflation

Key points

Year-end inflation is forecast to remain under control in the medium term.Minimum family income substantially covers the value of the basket of goods and services.The dollarization regime guarantees low inflation.There is a limited connection between consumer and producer inflation.

Analysis

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Year-end inflation is forecast to remain under control in the medium term. The effects of food-related commodity prices on consumer inflation areimportant given the weight food has in the consumer basket, which explains why we foresee some inflation deceleration in the short term. Regarding oilprices—a big price tag for the economy—the government subsidizes domestic consumption of oil derivatives, such that an increase in oil prices will have aneffect on domestic prices only if there is speculation or increases in other items. Expected lower oil prices are forecast to translate into less liquidity injectedinto the economy, generating less pressure on domestic demand. We estimate year-end consumer inflation to be in the neighborhood of 3.5%.

Minimum family income substantially covers the value of the basket of goods and services. The minimum family income covers around 90% of thevalue of the basket of goods and services used to measure poverty, a substantial increase from the 68% observed in January 2007 at the beginning of thisadministration. This is naturally one of the reasons to explain the government's high popularity levels as economic conditions for the larger part of thepopulation have improved. The increase in wages every January produces an upward adjustment in households' purchasing power, which retreats during theremainder of the year.

The dollarization regime guarantees low inflation. Thanks to the dollarization regime, inflation has converged toward international levels, although there arecertain elements that have frequently made inflation deviate momentarily—wage adjustments, higher tariffs on imported goods, import quotas, strikes, andsocial mobilizations, and higher energy costs resulting from power outages. The effects of food-related commodity prices on consumer inflation are importantgiven the weight food has in the consumer basket.

There is a limited connection between consumer and producer inflation. Using inflation figures of the last six years, producer and consumer inflation haveaccumulated advances of 39% and 29%, respectively, suggesting that profit shares for producers and distributors might have increased. Contrary to consumerinflation, annual producer inflation shows high volatility (fluctuating from as low as 1.1% and up to 19.4%), mainly in response to the impact of volatile oil prices,making it very difficult to find any correlation between both macroeconomic series.

Data

Inflation Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Consumer Price Index (% change) 5.1 2.7 3.6 3.4 3.6 3.7 3.8 4.1

Wholesale-Producer Price Index (% change) 2.0 1.1 -2.0 -19.5 2.3 5.3 6.4 6.0


Exchange rates

Key points

Ecuador has adopted the US dollar as its domestic currency since March 2000. The exchange rate is anticipated to remain on a par with the US dollar inour medium- to long-term forecast horizon.

Analysis

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Analysis

Ecuador has adopted the US dollar as its domestic currency since March 2000. The exchange rate is anticipated to remain on a par with the USdollar in our medium- to long-term forecast horizon. We do not update this section. Since March 2000, Ecuador's official currency has been the US dollar,which was substituted for the sucre at a rate of 25,000 per US dollar. As a result of dollarization, Ecuador no longer runs its own monetary policy. It is set bythe US Federal Reserve (Fed), which will not take into account the state of the Ecuadorian economy when setting policy. The central bank issues coins, but thetotal amount in circulation remains less than USD150 million. Please refer to the US country report, updated on a monthly basis, for related additionaldevelopments—reported in the US exchange rate section—that may have an effect on Ecuador’s economic performance. As of first-quarter 2015, we do notanticipate any immediate risk of Ecuador’s government ending the dollarization regime in the upcoming quarters.

Data

Exchange Rate Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Exchange Rate (LCU/US$, end of period) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Exchange Rate (LCU/US$, period avg) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Exchange Rate (LCU/Euro, end of period) 1.32 1.38 1.21 1.06 1.13 1.25 1.32 1.34

Exchange Rate (LCU/Euro, period avg) 1.28 1.33 1.33 1.08 1.09 1.19 1.29 1.33


Policy

Monetary policy

Key points

Ecuador uses the US dollar as its currency and is expected to do so for the foreseeable future, meaning that the country has relinquished its right to anindependent monetary policy.

Analysis

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Ecuador uses the US dollar as its currency and is expected to do so for the foreseeable future, meaning that the country has relinquished its rightto an independent monetary policy. We do not update this section. By adopting the US dollar as its domestic currency in March 2000, Ecuador relinquishedits right to conduct its own monetary policy. This is set by the US Federal Reserve (Fed), which will not take into account the state of the Ecuadorian economywhen setting policy. The central bank issues coins—the total amount in circulation remains less than USD150 million. Please refer to the US country report,updated on a monthly basis, for related additional developments in US monetary policy that may have an effect on Ecuador’s economic performance. As offirst-quarter 2015, we do not anticipate any immediate risk of Ecuador’s government ending the dollarization regime in the upcoming quarters.

Data

Monetary Policy Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Short-term Interest Rate (%, end of period) 4.53 4.53 4.90 5.36 5.64 5.94 5.87 5.97

Long-term Interest Rate (%, end of period) 5.35 5.35 6.55 7.16 7.11 7.08 7.03 7.24

M2 Money Supply (US$, end of period) 25.9 29.3 33.4 37.6 42.4 47.6 53.5 59.8


Fiscal policy

Key points

Public accounts will tend to improve into the medium term, once crude-oil prices recover.The fiscal transparency law sets a limit over the level of indebtedness.

Analysis

Public accounts will tend to improve into the medium term, once crude-oil prices recover. The weakness of public finances was first observed in 2009with lower oil prices, having improved during the following two years. The fiscal deficit widened in 2012–13, as the government continued to spend at anaccelerated pace. Part of the problem is the fast expansion of Ecuadorian bureaucracy, evidenced by the increasing number of ministries and other publicinstitutions—a condition engineered by this administration. This lack of maneuvering space means that any reduction in revenues immediately generates largerdeficits, as the government is not able to cut current expenditures easily. The government plans to compensate for the large drop in crude-oil prices estimatedfor 2015–16 by cutting public investment. The outlook estimates a fiscal deficit in 2015 at around 5% of GDP with secured diversified sources of financing. Inthe medium term, public deficits are expected to shrink to -1.1% of GDP on average, anticipating the mining sector to gain momentum. The governmentcontinues to secure financing from China and successfully placed a USD2-billion sovereign bond in international markets in mid-2014 to finance major publicprojects such as irrigation projects, repairs to railroads, and hydroelectric power plants.

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The fiscal transparency law sets a limit over the level of indebtedness. Lack of access to the financial markets following the debt default and exchange,together with constrained liquidity among local investors after large debt placements (particularly the Social Security Institute), made country allies the lendersof last resort for Ecuador's government. Taking debt from non-traditional sources might require giving up on other issues, including foreign affairs. The increasein public indebtedness will naturally affect Ecuador's debt ratios. The Public Finance Code would allow the government to hide debt placements and setpayments in the form of bonds, further undermining fiscal responsibility. On the positive side, the debt-to-GDP ratio is reduced to a maximum 40%, down from50%, maintaining the limit set by the Fiscal Transparency Law currently in place. Nevertheless, the good intention is an overstatement, as in exceptional caseswhen additional indebtedness above that limit is needed, such moves will require the approval of the Legislative Assembly. In addition, the state will continue toact as a guarantor for public entities borrowing locally or abroad to finance infrastructure projects, but such guarantees will not be accounted as public debt,understating the debt exposure.

Data

External sector

Key points

The current-account deficit is anticipated to tighten in the near term.The dollarization framework imposes an important constraint on export-oriented sectors, as competitiveness no longer comes from devaluations of thelocal currency, but rather from productivity gains.

Analysis

The current-account deficit is anticipated to tighten in the near term. The dynamics of global economic performance will tend to improve in the upcomingquarters. Crude-oil markets remain oversupplied, and we expect the price to decline to an average of USD40 per barrel in the second quarter. Volatility willremain high. Ecuador's access to the US market is the major risk to the forecast into the medium term. Exporters are in a difficult situation, as Ecuador wouldunlikely receive another extension for the Andean Trade Promotion and Drug Eradication Act (ATPDEA), particularly after diplomatic relations with the UnitedStates have deteriorated. On 17 February, the European Commission published a final draft of an EU-Ecuador partial trade agreement, originally approved inDecember 2014, which paves the way for the gradual reduction of tariffs on goods trading between Ecuador and the European Union. An existing tradeagreement has been extended as an interim measure. Beyond the reduction or elimination of most tariffs on primary goods, the deal also strengthensinvestment protections—a key concern of investors in Ecuador. The economy excessively depends on a single commodity, which affects both government andexternal accounts. Nevertheless, the high volatility in external accounts in the recent past will tend to decrease into the medium term.

The dollarization framework imposes an important constraint on export-oriented sectors, as competitiveness no longer comes from devaluations ofthe local currency, but rather from productivity gains. Low levels of competitiveness also affect productive sectors supplying domestic consumers becauseaffordable foreign products are imported, damaging local industries. Lower exports and higher imports—paired with limited inflows of foreign investment, bothdirect and portfolio—are real threats to the balance of payments and therefore do not support the dollarization regime. Globalization and market integrationrequire higher productivity to compete, which depends on the incorporation of technology in the production process, better infrastructure, plant equipment, andhighly trained human capital. All of these require investment. In the opinion of IHS, Ecuador has not done enough so far to attract additional domestic andforeign investment. Our medium-to-long-term forecast clearly reflects this weakness. Additionally, the government does not have the opportunity todevaluate—or allow the market to devaluate—its local currency to reduce trade imbalances and generate competitiveness gains, as has occurred in othercountries in the region. The weakness of the US dollar—one of the benefits brought by dollarization—helps exporters regain some competitiveness.

Data

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Trade and External Accounts Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Exports of Goods (US$ bil.) 24.6 25.7 26.9 21.5 23.0 25.1 27.9 29.3

Imports of Goods (US$ bil.) 24.5 26.2 26.3 24.1 25.1 26.8 29.9 33.0

Trade Balance (US$ bil.) 0.0 -0.5 0.6 -2.6 -2.1 -1.7 -1.9 -3.6

Trade Balance (% of GDP) 0.1 -0.5 0.6 -2.4 -1.9 -1.4 -1.5 -2.6

Current Account Balance (US$ bil.) -0.3 -1.3 -2.3 -2.3 -1.6 -1.4 -1.8 -2.1

Current Account Balance (% of GDP) -0.4 -1.4 -2.3 -2.1 -1.4 -1.1 -1.4 -1.5


Key indicators and forecasts

Data (forecasts)

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Detailed Macro-Economic Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 7.9 5.2 4.6 3.3 1.6 2.9 2.8 3.4 3.6



Nominal GDP Per Capita (PPP$) 9,882 10,417 10,890 11,233 11,401 11,772 12,159 12,652 13,194

Real Consumer Spending (% change) 5.1 2.7 3.2 3.7 1.9 2.2 2.2 3.4 3.1

Real Fixed Capital Formation (% change) 14.3 10.6 10.7 5.4 5.1 5.9 5.3 4.3 4.3

Real Government Consumption (% change) 8.7 11.1 7.7 1.6 4.0 3.7 3.9 3.8 3.9

Real Imports of Goods and Services (% change) 3.6 0.8 7.0 5.1 4.0 3.3 3.6 3.1 3.1

Real Exports of Goods and Services (% change) 5.7 4.7 2.4 4.1 3.2 3.0 3.0 3.4 3.8


Wholesale-Producer Price Index (% change) 19.4 2.0 1.1 -2.0 -19.5 2.3 5.3 6.4 6.0

Short-term Interest Rate (%) 4.56 4.53 4.53 4.90 5.36 5.64 5.94 5.87 5.97

Long-term Interest Rate (%) 6.29 5.35 5.35 6.55 7.16 7.11 7.08 7.03 7.24

Fiscal Balance (% of GDP) -0.6 -2.0 -4.3 -5.0 -5.6 -2.6 -0.8 -0.8 0.2

Population (mil.) 15.25 15.49 15.74 15.98 16.23 16.47 16.71 16.94 17.18

Population (% change) 1.6 1.6 1.6 1.6 1.5 1.5 1.5 1.4 1.4

Unemployment Rate (%) 6.0 4.9 4.7 5.1 4.9 4.6 5.0 4.8 4.7

Current Account Balance (US$ bil.) -0.3 -0.3 -1.3 -2.3 -2.3 -1.6 -1.4 -1.8 -2.1

Current Account Balance (% of GDP) -0.4 -0.4 -1.4 -2.3 -2.1 -1.4 -1.1 -1.4 -1.5

Trade Balance (US$ bil.) -0.2 0.0 -0.5 0.6 -2.6 -2.1 -1.7 -1.9 -3.6

Trade Balance (% of GDP) -0.2 0.1 -0.5 0.6 -2.4 -1.9 -1.4 -1.5 -2.6

BOP Exports of Goods US$bn 23.1 24.6 25.7 26.9 21.5 23.0 25.1 27.9 29.3

BOP Imports of Goods US$bn 23.2 24.5 26.2 26.3 24.1 25.1 26.8 29.9 33.0


Exchange Rate (LCU/Yen, end of period) 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Exchange Rate (LCU/Euro, end of period) 1.29 1.32 1.38 1.21 1.06 1.13 1.25 1.32 1.34


Debt Indicators

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Foreign Exchange Earnings (US$ bil.) 22.2 27.3 28.8 29.5 31.5 34.3 37.4 40.5 43.8 ..

Portfolio Investment, Net (US$ bil.) -0.7 0.0 0.1 -0.9 -0.2 -0.3 -0.1 -0.1 0.0 ..

Portfolio Investment, Net (% of GDP) -1.1 0.1 0.1 -1.0 -0.2 -0.3 -0.1 -0.1 0.0 ..

Foreign Direct Investment, Net (US$ bil.) 0.2 0.6 0.6 0.7 0.8 0.8 0.8 0.9 0.9 ..

Foreign Direct Investment, Net (% of GDP) 0.2 0.8 0.7 0.8 0.7 0.7 0.7 0.7 0.7 ..

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Foreign Exchange Reserves, Excl. Gold (US$ bil.) 1.4 1.7 1.1 3.3 5.5 4.4 4.3 4.1 4.5 ..

Import Cover (Months) 0.8 0.8 0.5 1.3 1.2 1.1 1.0 0.9 0.9 ..

Total External Debt (US$ bil.) 13.9 15.2 15.8 18.4 21.7 21.6 21.4 20.4 22.7 ..

Total External Debt (% of GDP) 20.0 19.2 18.1 19.5 21.4 19.8 18.2 16.1 16.7 ..

Total External Debt (% of forex earnings) 62.7 55.7 54.9 62.5 69.1 62.9 57.3 50.3 51.7 ..

Short Term External Debt (US$ bil.) 0.8 0.7 0.7 1.2 1.7 2.2 2.1 1.9 2.1 ..

Short Term External Debt (% of total external debt) 5.8 4.9 4.2 6.4 8.0 10.0 9.8 9.6 9.4 ..

Short Term External Debt (% of international reserves) 56.0 44.7 62.3 35.3 31.6 49.2 48.2 47.3 47.2 ..

Total External Debt Service (US$ bil.) 1.8 2.4 2.6 3.4 4.2 3.7 3.8 3.6 4.1 ..

Interest Payment Arrears (US$ bil.) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ..

External Liquidity Gap (% of forex earnings) 8.1 2.9 2.8 11.3 13.9 12.3 9.8 7.1 14.9 ..

Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from quarterlySource:Sovereign Risk forecast bank (SRS).

Key facts and demographicsArea: 276,840 km2

Language: Spanish

Religion: Roman Catholic

Time Zone: GMT -5 (mainland), GMT -6 (Galápagos Islands)

Population: 14,464,739 (2010, World Bank)

Neighbours: Colombia, Peru

Capital City: Quito

Primary Port: Guayaquil

Primary Airport: Mariscal Sucre International Airport, Quito

Currency: US dollar (USD)

External trade

OverviewIn 2005, Ecuador started negotiations with the United States, Colombia and Peru to enact the US-Andean free-trade agreement (FTA). Negotiations have beendelayed indefinitely under the new government, which is clearly opposed to any approach towards the tightening of US commercial relationships. This decisionwould affect the country in the near future, when the United States ratifies the agreement already approved by the Colombian and Peruvian Congresses. Inaddition, it would impact exporters in terms of higher costs as Ecuadorian products will be required to pay tariffs in order to enter into the United States,reducing their ability to compete with similar goods. Ecuador currently does not have any trade agreements with the US or Europe, the US being its maintrading partner. The conclusion of the banana trade dispute between Latin American countries and the EU—resolved in November 2012—is likely to havefacilitated the resumption of general trade negotiations between the EU and Ecuador in early 2013. Although Correa has repeatedly ruled out a comprehensiveFTA, his administration is keen to promote foreign direct investment in the country. The president said a number of issues were yet to be resolved before anagreement could be made. These included issues relating to the freedom to favor national firms when issuing public procurement contracts and local contentprovision. In this regard, the president argued that European firms investing in Ecuador should be encouraged to use local materials, technology, and laborwhen feasible.

The government of President Rafael Correa is trying to strengthen the links with Mercosur despite the fact that Ecuadorian trade with Mercosur’s membersdoes not exceed 1.0% of its total, with limited potential in terms of product appetite. In May 2013, Correa stated his intention to begin entry negotiations withthe Southern Common Market, although a number of issues would have to be addressed before Ecuador agreed to entry, including allowing greater flexibilityof the common external tariff. Correa said Ecuador would notify Mercosur of its intention to negotiate entry protocols to assume full membership. Uruguay,

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which currently holds the Mercosur presidency, proclaimed that it "fully agrees and commemorates Ecuador's decision to begin negotiations". Mercosurcurrently comprises Brazil, Argentina, Uruguay, and Venezuela. Paraguay's membership was suspended in June 2012 following the impeachment of PresidentFernando Lugo. At present, Ecuador has associate member status. The possible expansion of Mercosur—Bolivia began formal entry negotiations in December2012—coincides with the strengthening of the region's other major trading bloc, the nascent Pacific Alliance, which includes Chile, Peru, Colombia, andMexico.

Trading partnersThe current administration of Rafael Correa is particularly adverse to free trade agreements, preferring partial trade agreements in order to protect its domesticindustries. Despite a deterioration of relations between Ecuador and the US under Rafael Correa, the US remains Ecuador’s main training partner, receivingthe largest amount of Ecuadorian exports and providing Ecuador with its largest amount of imports. Other key export partners include Panama, Peru,Venezuela and Chile. In terms of imports, the greatest contributors beyond the US are China, Colombia, Panama and Peru.

DataEcuador: Major Trading Partners, 2013

EXPORTS IMPORTS

Country Billions of USD Percent Share Country Billions of USD Percent Share

United States 11.1 44.6 United States 7.9 29.1

Chile 2.5 9.9 China 3.5 12.9

Peru 1.9 7.5 Colombia 2.3 8.5

Colombia 0.9 3.7 Panama 1.8 6.8

Russia 0.8 3.3 Peru 1.1 4.1

Spain 0.8 3.1 South Korea 1.0 3.8

Panama 0.6 2.5 Mexico 1.0 3.6

Japan 0.6 2.3 Brazil 0.9 3.2

China 0.6 2.3 Spain 0.7 2.7

Venezuela 0.5 1.9 Chile 0.6 2.3

Source: IMF, Direction of Trade

Ecuador: Major Trading Partners, 2000

EXPORTS IMPORTS

Country Billions of USD Percent Share Country Billions of USD Percent Share

United States 1.9 38.0 United States 0.9 25.0

South Korea 0.3 6.4 Colombia 0.5 14.0

Panama 0.3 6.0 Japan 0.3 8.2

Peru 0.3 6.0 Venezuela 0.2 7.0

Colombia 0.3 5.4 Chile 0.2 5.6

Chile 0.2 4.5 Brazil 0.1 3.7

Italy 0.2 3.3 Germany 0.1 3.2

Japan 0.1 2.7 Mexico 0.1 3.2

Germany 0.1 2.6 Panama 0.1 2.8

Russia 0.1 2.5 Peru 0.1 2.1

Source: IMF, Direction of Trade

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Economic development

OverviewIn recent decades, the government tended to alternate between groups representing the people of the coastal region, which includes the relativelyprosperous business city of Guayaquil, and those with greater support in the Andes, which covers the capital of Ecuador. This scenario has changeddramatically since 1996, with no single elected president able to finish his mandate, with a total of 11 different presidents in a 10-year period. President RafaelCorrea was inaugurated early in 2007, with a reformist agenda that included a call for a new constitution, higher state participation in current oil windfalls, andthe implementation of XXI Socialism. His political movement gained absolute majority in the election for Constitutional Assembly members, opening the doorfor a complete overhaul of the institutional framework and the government's structure. As a result of the new constitution, a new electoral round took place inearly 2009, with President Correa winning the reelection for a new four-year term. Correa was reelected for a new term in early 2013.

A persistent challenge for governments has been the need to rein in the public finances. While numerous fiscal-adjustment policies were introduced, fewwere adhered to as governments capitulated to pressure to restore cuts. Moreover, a dependence of public revenues on oil, typically 25% to 30%, makes thepublic finances heavily vulnerable to shifts in world oil prices. As a result, defaulting on sovereign debt has been a theme of Ecuador's economic history overthe past 20 years (Brady Plan in 1993, Brady debt default in 1999, and sovereign debt default in 2008–09). Ecuador's external debt has been on a smoothdownward trend during the last decade, currently estimated at around 21% of GDP.

Changes in the exchange-rate regime have been frequent up to 2000, when the dollarization regime was adopted. A dirty float was introduced in 1992,only to be rapidly replaced by a crawling peg regime in 1994. The parameters of the exchange rate band were changed six times from 1995 to 1998, leavingthe credibility of the regime in tatters. The currency was then allowed to float freely and, six months after debt default was declared in September 1999,dollarization was implemented with the US dollar replacing the sucre at a rate of 25,000 per US dollar. Subsequently, the defaulted debt was renegotiated, adeal signed with the International Monetary Fund, while the introduction of the dollar saw inflation decelerate sharply. While the Noboa administrationsucceeded in complying with the terms of this International Monetary Fund (IMF) program, the authorities have subsequently struggled to push throughstructural reforms mandated by such agreements, and regarded as essential in the context of dollarization. The abandonment of the sucre means that Ecuadorcan no longer set its monetary policy, while dollarization also makes balancing the budget essential (given that the authorities can no longer print money) aswell as attracting solid capital flows from abroad and adopting structural reforms to increase the country's competitiveness. During the administration ofPresident Rafael Correa, the country's relationships with the IMF and the World Bank have deteriorated, with the authorities approaching some friendlygovernments in their quest for financing.

Governments have been constrained by the extreme difficulty of winning congressional backing for the unpopular reforms necessary to renderdollarization sustainable and maximize the chances of obtaining sustainable economic growth into the medium term. In the past, authorities had limited room tomaneuver because powerful groups in society, including pensioners and the indigenous, pursued their demands not through the political parties, but throughmass mobilizations and strikes. The environment changed dramatically under the first part of the Correa administration, with the president retaining politicalsupport from the vast majority of the population while concentrating his power in all state powers.

Labor marketsThe population is relatively young. According to the latest population survey, Ecuador had 14.48 million inhabitants in 2010. Almost 61% of all Ecuadorianslive in urban areas, as opposed to 50 years ago, when the ratio was only 29%. The population can be considered relatively young, with almost 53% under 24years old, and less than 7% above 65 years old. Although there are some problems inherent to the social security system, an aging population is not a threatagainst the system or fiscal accounts in the medium term.

High unemployment and underemployment affect a large part of the population. Some 45% of the labor force is estimated to work in the commerce andservice sectors, approximately 27% work in agriculture, and 24% work in industry, mining, construction, and transportation. Underemployment ishigh—estimated at 45%—being the proportion working in the informal sector. Recent administrations have attempted to push through legislation designed torender the labor force more flexible. Labor relations in state-owned enterprises tend to be poor. Strikes are an oft-used mechanism, and interruptions in theprovision of key public services are common as a result.

Monetary systemSince March 2000, Ecuador's official currency has been the US dollar, which was substituted for the sucre at a rate of 25,000 per US dollar. As a result ofdollarization, Ecuador no longer runs its own monetary policy. This is set by the US Federal Reserve, which will not take into account the state of theEcuadorian economy when setting policy. The central bank issues coins, but the total amount in circulation remains below USD150 million. We do notanticipate any change to the exchange rate in the medium-to-long term.

Financial systemThe financial system came under heavy pressure in the late 1990s. As the value of the sucre dropped precipitately, banks' balance sheets were severely hit,owing to the large proportion of debts denominated in dollars. Moreover, regulation of the sector was extremely lax. The authorities failed to contain thecollapse of a small player in 1998, resulting in the breakdown of the financial system as a whole. This, in turn, led to the freefall of the currency and asovereign-debt default. The imposition of a 1% tax on financial transactions in January 1999 did not help. Some 16 of the 40 banks operating were afflicted bythe crisis. Since dollarization in early 2000, various measures have been taken to put the sector on a more secure footing. These include the elimination of the

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financial-transactions tax, the creation of a bank-liquidity fund, a corporate-debt restructuring scheme, and the recapitalization of Banco del Pacifico, one of thelargest financial institutions in Ecuador, which is still owned by the government but is operated by private management. The financial system currently enjoyshigh profitability rates thanks to high interest rates and fees on services. Nevertheless, the government wants to decrease interest rates at all costs after a newlaw to limit bank profits—submitted by President Correa but revised by Congress—has failed to deliver better financial conditions for bank clients.

After almost two years' delay, President Rafael Correa sent legislation to Ecuador's congress in April 2013 toward integrating the country's two securityexchanges, Bolsa de Valores de Quito and Bolsa de Valores de Guayaquil, in order to have a national exchange market to further develop Ecuador's stockmarket. This project had been discussed since Colombia, Peru, and Chile integrated their capital markets into the Integrated Latin American Market (MILA) atthe end of May 2011, allowing investors from the three countries to buy and sell stocks in the three markets simultaneously. Ecuador's market was left out ofMILA, which competes against other stock markets in the region, such as Brazil's and Argentina's. The integration intends to have an efficient stock market thatlets investors open positions in either Quito or Guayaquil, closing them from any other location under integrated computer systems that will now show a uniquequote for any stock. Bolsa de Valores de Quito and Bolsa de Valores de Guayaquil have 32 and 20 authorized exchange intermediaries, respectively, thatoperate for clients or themselves.

Natural resourcesIts geographic position, adequate rainfall, and diverse climates allow for the production of a variety of agricultural goods—not only on river floodplains in thecoast, but also in the flats, floodplains, and slopes of the highlands. The country has specialized in banana, coffee, cocoa, and flowers production, with theagricultural sector representing about 8% of total GDP. Its long seacoast is adequate for fishing, while the highlands and lowlands are fit for cattle activities anddairy farms.

In economic terms, the most valuable natural resource lies below the surface, with oil and gas representing about 10% of its total GDP, 52% of total exports,and 30% of total government revenues. Despite the existence of large gas reserves and other minerals, the country has concentrated exclusively on oilexports, lacking the adequate refining capacity. President Correa envisions a new mining law that would open the sector to large-scale initiatives.

The variety of weather conditions and rich ecosystems—not only in continental Ecuador (highlands, coast, and the rainforest), but also on the GalápagosIslands—continue to attract visitors from around the world.

Key sectorsOil: Ecuador is one of Latin America's leading crude exporters, with production averaging an estimated 561,000 barrels per day (b/d) as of the end of 2014.Proven reserves stand at 4.5 billion barrels, according to the . Oil is the country's leading export and typically provides the government withOil and Gas Journal25% to 30% of total public revenues. Petroecuador's crude production declined over the past decade due to insufficient investment in field maintenance, havingexpanded due to the transfer of oil operations from Occidental Petroleum Company because of violations of contracts. State-oil production has continued todecline.

Bananas: Ecuador is the world's leading banana exporter, accounting for about 10% of total exports. Its exports suffered during the 1990s due to a preferentialEU banana import regime in favor of former colonies in African, Caribbean, and Pacific (ACP) countries, leading to an estimated USD450 million a year in lostearnings for Ecuador. Prior to the introduction of the arrangement in 1993, Ecuador was the EU's largest banana supplier. A World Trade Organization (WTO)ruling in favor of Ecuador in 1999 encouraged the government to ask permission to deploy sanctions against the European Union—a request that was grantedin May 2000. The landmark WTO ruling allowed for USD201.6-million worth of sanctions against EU goods, services, and intellectual property. The EuropeanUnion and United States announced a surprise truce in April 2001, ending their long-running and often bitter trade dispute over bananas. Ecuador initiallyrejected the terms of the agreement, stating that it would benefit more from a first-come, first-served system, also backed by Dole, the US export company. TheEcuadorian government subsequently accepted the terms of the deal after it was reassured by EU claims that it would have sizeable access to the 17% of theEU import market that is to be reserved for producers not belonging to ACP countries. In the context of dollarization, banana growers have come underincreasing pressure to maintain competitiveness vis-à-vis countries with cheaper labor costs or currencies that tend to depreciate in real terms against the USdollar, euro, et al.

Shrimp: Exports of shrimp account for 10% of total exports, making it the largest export sector within the non-oil traditional group, just behind banana exports.Owing to the premium quality and production under safe environmental practices, Ecuadorian producers advertise their shrimp as the “best in the world.” Themain destination is the European Union, reaching 40% of total exports.

Flowers: The flower industry provides around USD0.8 billion in sales, making it the fourth largest source of export earnings within the group of non-oiltraditional exports. Favorable climatic and soil conditions have encouraged foreign investment in flower plantations in the mountainous region of northernEcuador. While recognizing that the plantations provide an important source of employment, there are concerns among local indigenous communities that theincrease in plantations will reduce the amount of land available for food production and that the use of pesticides and genetically modified seeds will have anadverse impact on the environment and the health of the local population. Dollarization makes it essential that local producers raise productivity levels in theyears ahead to remain competitive.

Key sectors dataEcuador: Top-10 Sectors Ranked by Value Added

2014 Level 2015 Percent Change Percent Share of GDP

(Bil. US$) (Real terms) (Nominal terms)

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1. Construction 11.7 3.6 12.3

2. Oil & gas mining 10.7 1.3 11.2

3. Agriculture 8.7 4.0 9.1

4. Education 7.7 3.3 8.0

5. Public Admin. & Defense 6.2 4.0 6.5

6. Retail trade - total 5.8 3.0 6.0

7. Wholesale trade 4.4 3.4 4.6

8. Refined petroleum & related 4.0 3.9 4.2

9. Sanitation, trade organizations 3.9 1.5 4.1

10. Health and social services 3.9 2.7 4.0

Top-10 Total 67.0 70.0

Source: World Industry Service, IHS Economics

Updated: 20 Jan 2015

HighlightsEcuador presents a moderate risk for foreign investment. Particular areas of weakness include economic, legal, and operational risks, largely due to thegovernment's tendency towards protectionist policies and resource nationalism, and its partial default on its sovereign debt obligations in 2008. Operationalrisks are likely to further deteriorate if the government decides to withdraw from its remaining bilateral investment treaties as President Rafael Correa haspreviously threatened. In December 2014, Ecuador signed a preferential trade agreement with the European Union, providing greater market access for EUcompanies in certain sectors including automotive parts, beverages, and professional services. That said, infrastructure development has improvedconsiderably under Correa. Ecuador performs marginally better in taxation risks, although this remains high compared to the regional average. In relation topolitical risks, Ecuador is improving. Correa's re-election in February 2013 signalled a continuation of one of the most politically stable periods in the country'shistory. However, the weakness of opposition parties, which collectively control 37 of 137 seats in the National Assembly, is likely to reduce the level ofeffective oversight on government policies and encourage extra-parliamentary protest. In the February 2014 local elections, Correa’s Country Alliance (AlianzaPaís: AP) lost control of the capital Quito and the city of Cuenca, while opposition mayor Jaime Nebot retained the country's commercial capital, Guayaquil.Although the elections proved a symbolic defeat for Correa, they have not undermined his government’s ability to implement policy. Ecuador performs best interms of security risks, largely due to the lack of homegrown terrorist or insurgency groups, although the country does provide shelter to Colombian criminalsand transnational crime organisations that use the country as an illicit drug export hub. Record levels of cocaine seizures in 2013 and 2014 suggest this risk isgrowing, although the high levels of violence typically associated with drug activity are yet to fully materialise. On the contrary, murder rates have beenconsistently falling in the country.

Copyright of Ecuador Country Monitor is the property of IHS Global Inc. and its content maynot be copied or emailed to multiple sites or posted to a listserv without the copyright holder'sexpress written permission. However, users may print, download, or email articles forindividual use.

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