Ecuador - Economy
As an economy that is heavily dependent on oil revenues and is fully dollarized, Ecuador has recently been hit by sharply declining commodity prices and real exchange rate appreciation. The drop in oil prices deeply affected the economies of almost all of Latin America, resulting in devalued currencies, a rise in the exchange rate and the plummeting of real income. The dollarization of the economy in Ecuador made it an anomaly in this regard, though the high price of the dollar made Ecuadorean exports more expensive in comparison to its competitors.
Rafael Correa had been in power since the elections of November 26th 2006. After a decade of his government, Ecuador has lived a profound social and economic change. In 2007, the percentage of poor people by income was 36.7%, this number decreased to 23.3% in 2015, meaning more than one million Ecuadorians have overcome poverty. In 10 years, the breach between the 10% richest in relation to the 10% of the poores went from 42 to 25, shortening the inequality among those who receive the higher incomes and the ones who get lesser money. Between 2007 and 2015 the poorest quintile doubled their monthly per capita income. Ecuador is a middle-income country with an economy dependent on its natural resources. Oil represented over half of total exports in 2014, followed by food and agricultural goods with approximately one-fourth of exports. Over the past decade, Ecuador experienced growth in the context of a favorable external environment that together with foreign savings financed a large expansion of the public sector. Over that same period of high oil prices, Ecuador made significant gains in reducing poverty and promoting shared prosperity. Poverty rates fell from 38.3 to 25.8 percent between 2006 and 2014, and the income of the bottom 40 percent of the population saw annualized growth rates of nearly 7 percent compared with only 4 percent nationwide.
These advances have placed Ecuador among the top performers in Latin America and the Caribbean in terms of reducing poverty and improving shared prosperity. These gains, however, are coming under stress. The drop in oil prices in 2014, coupled with the strengthening of the U.S. dollar are raising concerns on whether these social advances can be sustained in the coming years. The macroeconomic effects of the new global context have widened Ecuador’s fiscal and external imbalances. With limited buffers to draw upon, the Government of Ecuador (GoE) has taken measures since 2014 to partially offset the impact of lower oil prices on the economy, involving budget cuts and restrictions on imports, including temporary tariff surcharges. The GoE has also taken some steps to promote private investment and job creation, which nonetheless remain depressed.
One notable policy of Rafael Correa was the signing of an agreement with the European Union. This trade agreement with the EU, which in many ways continues previous preferential agreements with the 513-million customer bloc, provides an opportunity for Ecuadorean exports, mainly for raw materials and agricultural goods, to enter Europe without tariffs.
Supported by positive terms of trade and large public investments, growth averaged 4.5 percent over the decade 2005-2015, while social indicators improved. Reflecting Ecuador’s goals of diversifying energy production and improving infrastructure and social equality, the overall fiscal position of the non-financial public sector (NFPS) deteriorated from balance in 2011 to a deficit of 3.5 percent of GDP in 2012–14, mainly driven by high capital spending. The poverty rate and the GINI coefficient fell, respectively, from 38 percent and 0.54 in 2006 to 22.5 percent and 0.47 in 2014, while the unemployment rate declined significantly. Financial stability was preserved, supported by dollarization. In 2014, growth moderated to 3.8 percent in line with developments in the region.
Since the fourth quarter of 2014, the economy has been hit by external shocks and is slowing down. The sharp decline in the international oil price, by about half for the Ecuadorian mix, significantly undercut oil revenues. In addition, competitiveness is being eroded by the real appreciation of the exchange rate—by 16 percent year-over-year through June 2015.
The authorities responded rapidly to the shocks by cutting public spending, introducing balance of payment safeguards, and containing minimum wage growth. As a result, non-oil imports have been declining significantly from April 2015, and the 2015 fiscal deficit is expected to be contained to the original budget target. Nonetheless gross financing needs remain large, and international access to credit has tightened.
To regain competitiveness, substantial real wage and price adjustments were called for. The loss in competitiveness would be felt in full upon the eventual removal of import surcharges. As real wages had increased faster than labor productivity over the decade 2005-2015 and the minimum wage was one of the highest in the region, restoring competitiveness in the face of the recent real exchange rate appreciation required containing wage growth substantially below inflation for a few years. Hence the correction in wage dynamics needed to go beyond the authorities’ plan envisaging public wages to rise with inflation and private wages to rise with inflation plus productivity. Labor market rigidities could be addressed through reducing the overall cost of dismissal, promoting the availability of short-term employment contracts, and facilitating labor force participation (for example by expanding child care access).
President Correa's economic priorities included higher social spending, increased government control over strategic sectors, and ensuring a greater share of natural resource revenues for the state. However, after 4 years in office, the government’s economic policies continue to evolve, creating some uncertainty for the business community. The World Economic Forum's Global Competitiveness Index rated Ecuador 105th out of 139 countries for 2010-11.
The Ecuadorian economy is based on petroleum production, manufacturing primarily for the domestic market, commerce, and agricultural production for domestic consumption and export. Principal exports are petroleum, bananas, shrimp, flowers, and other primary agricultural products. In 2010, crude and refined petroleum products accounted for 56% of total export earnings. Ecuador is the world's largest exporter of bananas and plantains (about $2 billion) and a major exporter of shrimp ($828 million) and cacao ($402 million). Exports of nontraditional products such as flowers ($598 million), canned fish ($601 million), and automobiles ($375 million) have become more important in recent years.
The oil sector typically accounts for 50%-60% of the country’s export earnings, 15%-20% of GDP, and 30%-40% of government revenues. Oil production is primarily carried out by the government, as well as by small domestic and several large foreign companies. Oil production declined between 2006 and 2009 due to insufficient investment, before leveling out in 2010. In late 2010 and early 2011, the government renegotiated all oil concession contracts, moving from a production-sharing arrangement to service (fee) contracts. Several oil companies declined to renegotiate; those operations were devolved to the state oil company, increasing the state’s share of national oil production from 62% in 2010 to roughly 71% in 2011.
With oil contract renegotiations complete, public and private investment in the sector is expected to increase, along with production levels. Additional oil concessions for certain marginal fields and new large tracts in the southern part of the country are expected to be offered in mid-2011. The mineral sector has been developing slowly. However, in early 2011, government negotiations commenced with mining companies interested in moving from an exploratory phase into production. To foster diversification of Ecuador’s economy, the Ecuadorian Government enacted a Production, Trade, and Investment Code in late 2010. The code is intended to promote production of higher value-added products, in particular by small and medium-sized businesses located in regions outside the major business centers of Quito and Guayaquil.
Ecuador adopted the dollar as its national currency in 2000, following a major banking crisis and recession in 1999. Dollarization led to stability, which helped Ecuador achieve solid economic performance through 2006. From 2000 to 2006, growth averaged 4.9% per year, supported by high oil prices, strong domestic consumer demand, increased non-traditional exports, and growing remittances (about $3 billion in 2006) from Ecuadorians living abroad. In 2007, economic growth slowed, constrained by declining petroleum production and reduced private sector investment. In 2008, the economy recovered, posting a 7.2% real annual growth rate due to higher oil prices, increased government spending and strong domestic demand.
By the end of 2008, the global financial crisis and economic downturn led to falling remittances and declining oil revenue for Ecuador. In December 2008 the government defaulted on certain debt issuances (its 2012 and 2030 Global bonds, with a total face value of approximately U.S. $3.2 billion). In June 2009, the government repurchased 91% of these bonds at a 65%-70% discount in a modified Dutch auction. Although oil prices rebounded in 2009, economic growth slowed due to a fall in internal demand resulting from the international financial crisis and reduced domestic investment. Remittances from foreign workers, Ecuador’s second-largest source of external revenues, after petroleum, declined 12% due to the worsening economic conditions in the United States and Spain, the two most important origins for remittances. According to official statistics, the real annual growth rate for Ecuador’s economy in 2009 was 0.36%.
As the global economy began to recover in 2010, Ecuador’s economy rebounded with a 3.6% growth rate. However, limited access to international financing, following the 2008 sovereign default, forced the government to reduce expenditure levels and cover a budgetary financing gap with loans from international financial institutions, funds from Ecuador’s Social Security Institute, and financing from China. Ecuador has received almost $3 billion in direct financing from China since 2009. This financing has usually taken the form of contracts with the Ecuadorian Government for forward sales of oil, and often carry interest rates above those generally charged by international financial institutions, such as the World Bank. Remittances from workers abroad continued to decline in 2010, falling 7% from the 2009 level. Between 2000 and 2010, per capita income increased from $1,324 to an estimated $4,013, while the poverty rate fell from 51% to 33%.
The Ecuadorian Government’s official forecast for GDP growth in 2011 is 5.1%. The Ecuadorian Government’s budget for 2011 totals $23.95 billion, with a $3.7 billion budget deficit and $4.95 billion financing gap. The 2011 budget is premised on an average price per barrel of Ecuadorian crude of $73.30. Higher export oil prices stemming from unrest in the Middle East are expected to provide Ecuador with substantial extra-budgetary revenue in 2011. Additional financing is expected to be in the form of loans from international financial institutions and disbursements from China for the forward sale of oil.
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