Dollarization (adopted in 2000) has allowed Ecuador to anchor inflation expectations and benefit from accommodative monetary policy in the U.S. The government has managed to boost growth in recent years through expansionary fiscal policy supported by high oil prices. We expect growth to soften this year and next, however, in light of less favorable external conditions.
- The Republic remains cut off from international capital markets since its voluntary default on $3.2 billion in global bonds in 2008. Anti-market policies have kept foreign direct investment inflows low despite significant potential in the oil and mining sectors.
- The Correa administration has relied on bilateral and multilateral funding to finance public sector spending. China is providing loans in exchange for secured access to Ecuador’s oil exports. While an acceleration of fiscal spending has, thus far, supported growth, it has also eroded the competitiveness of nonoil activities.
- The economy remains vulnerable to external shocks, as the government has failed to build a liquidity cushion to prepare for a period of lower oil prices.
November 18, 2013
Ecuador’s economic growth has become heavily dependent on public spending, which remains elevated despite declining oil revenue. Seeking to sustain growth, the government is increasing its liabilities. This strategy, however, is unsustainable over the medium term, which augurs increasing pressure on the dollarization regime. Meanwhile, attempts to attract foreign investment are being hindered by anti-business policies.Read More
July 16, 2013
A steady deterioration in remittances, a key foreign currency source for Ecuador’s dollarized economy, is adding pressure to external accounts at a time of intensifying global headwinds and more costly external financing options. We expect a continuation in this trend to further constrain domestic liquidity, weighing on already weakening growth prospects.Read More
June 20, 2013
The years of strong growth based on oil-financed public sector spending have come to an end. With limited access to external borrowing and no public savings, growth is bound to decelerate sharply in the years ahead, increasing the risk of eroding social support for the dollarization regime that has relinquished monetary and exchange rate policy independence.Read More
February 26, 2013
President Rafael Correa has won reelection and secured a commanding legislative majority. Correa’s tighter grip on power increases the likelihood of a radicalization of the current growth model based on high public sector spending and greater state intervention in the economy.Read More
August 03, 2012
The country’s macro position has deteriorated amid fiscal slippage and anti-business policies, increasing the economy’s vulnerability to shocks. We remain wary that government efforts to sustain growth may lead to an intensification of populist policies down the road.Read More
July 19, 2011
High oil prices have supported economic activity and fiscal revenue. However, the combination of increasing government intervention in the economy, rapidly growing public spending, a volatile revenue base and reduced sources of financing as a result of the 2008 default presents a precarious macroeconomic situation.Read More
November 30, 2010
The 2011 budget passed on Monday reflects continued expansionary fiscal policy. Although both the fiscal deficit and the financing gap are set to widen in 2011, ambitious public spending plans will be held back by financing constraints. The government is seeking new financing sources from local banks and the World Bank.Read More