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Ecuador

Ecuador

Population 16,5 million
GDP 5,917 US$
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Synthesis

major macro economic indicators

  2015 2016 2017(f) 2018(f)
GDP growth (%) 0.2 -1.5 0.0 0.3
Inflation (yearly average, %) 4,0 1.7 0.6 0.7
Budget balance (% GDP) -5.2 -8.4 -5.7 -4.4
Current account balance (% GDP) -2.1 1.4 0.3 -1.5
Public debt (% GDP) 26.1 36.2 40.0 43.0

 

(f): forecast

STRENGTHS

  • Significant mineral oil and gas potential
  • Tourism potential (flora, fauna, heritage)
  • Diverse climate allows for a wide range of crops
  • Marine resources: leading exporter of shrimp
  • Low risk of inflation due to fully dollarised economy

WEAKNESSES

  • Economy dependent on oil
  • Competitiveness subject to US dollar performance due to fully dollarised economy
  • Large informal economy and poorly qualified workforce
  • Legacy of sovereign default
  • State interventionism
  • Credit is expensive and underdeveloped; weakness of small banks
  • Low levels of domestic and foreign private investment

Risk assessment

Timid exit from recession

The economy is struggling to recover: public spending fuelled by oil revenues – its traditional driver – is anaemic. The dollarisation of the economy since 2000 has helped macro-economic stability, but low oil prices are exacerbating the country’s weaknesses (low competitiveness, inefficient and expensive public services, rigid labour market). Internal demand is still performing weakly, and the slight upturn in household consumption seems to have fizzled out. While inflation will remain weak because of the fully dollarised economy, household income will likely continue to be affected by wage freeze (not counting the 10% cut in senior civil servants’ salaries), as well as rising poverty rates and under-employment (only 39% of the workforce were in full-time employment in March 2017). In addition, the informal economy, which concerns 45% of jobs, means that many households do not benefit from the minimum wage or social benefits.

Public investment is expected to fall further. The government is making efforts to reduce the fiscal deficit, so as to prevent the debt from further hikes, and is prioritising politically important social spending rather than capital spending. Meanwhile, interventionism and the lack of competitiveness reduce private investor interest.

Exports might pick up slightly: oil sales are expected to benefit from firm prices, the slight upturn in production after the decision to no longer comply with OPEC’s ceiling, and operations at the new oilfields in the Yusuni national park by the national company, Petroamazonas (78% of domestic production). Exports of bananas, shrimps, tinned fish, and flowers will likely benefit from the strong performance of the North American and European markets. In contrast, cocoa exports will continue to disappoint because of the drop in production and low prices caused by both a fall in quality and disease affecting the cacao trees. Other sectors (including textiles, chemicals, pharmaceuticals, leather, and wood) will continue to be disadvantaged by their lack of competitiveness outside the dollar zone. Given that imports will be overshadowed by weak domestic demand, trade’s contribution to growth will be slightly positive.

 

Public debt requires supervision; external financing is fragile

Lenin Moreno, president since May 2017, has inherited a growing public debt burden, aggravated by the widening deficit. Declining oil revenues have not been matched by spending cuts, in large part due to reconstruction costs following the 2016 earthquake, the recession, and rising debt interest payments. In October 2017, the country once again issued ten-year bonds for USD 2.5 billion with a coupon of 8.875%. Following the public referendum scheduled for early 2018, steps will likely be taken in an attempt to sufficiently bring down the deficit so as to control the debt. This will be tough, as the president needs to find a compromise with the centre-right opposition, while also keeping those on the left of his party in line. This is compounded by poor prospects of a rapid rise in oil revenues, due to problems with the execution of construction contracts for a refinery, a gas liquefaction plant, and two oil pipelines. Meanwhile, production at fields awarded to the private sector is declining, reducing the benefits of increased output from fields operated by Petroamazonas.

Despite the restrictions on imports, the current account is likely to dip into the red again. Because of insufficient refinery capacity, the country has to import expensive oil products. In addition, accrued debt interest and profit repatriation exceed the value of remittances from expatriate workers. Finally, freight costs and oil sector service payments to foreign companies will exceed tourism income. Weak FDIs will not suffice to cover the deficit, so there will undoubtedly be a need to once more turn to external borrowing, potentially from China – who is already the country’s main foreign creditor and investor. Foreign exchange reserves are low, despite tax incentives for companies to repatriate their foreign exchange and the tax on capital outflows. In this context, the IMF carried out another local inspection mission. Renewed relations, after being suspended for ten years, could bring down the cost of finance, but at the price of faster fiscal consolidation.

 

Pragmatism of the new president, Lenin Moreno

The President and his predecessor Rafael Correa disagree over policy and are competing for control of their party, the Allianza Pais (AP). Cutting a softer left-wing image, Lenin Moreno (77% approval rating in September 2017) plans to hold a referendum in early 2018, aimed at limiting presidential terms of office to two years (a return to the pre-2015 position) – thus preventing Correa from standing in 2021 –, at removing civil rights from persons convicted of corruption, and at reforming the Consejo de Participacion Ciudadana y Control Social which decides on the appointment of magistrates and is controlled by Correa’s allies. Divisions within the party and across the political scene weaken the government. The AP’s number of seats (74 out of 137) fell in favour of the centre and the right during the last 2017 elections.

 

Last update: January 2018

Payment

Cheques are still a frequently used means of payment for commercial transactions in Ecuador. Nevertheless, the use of cheques is declining, due to a growing preference for electronic payments for transactions of all values.

Credit transfers are used for both high-value and low-value payment transactions. High-value and urgent inter-bank transfers are usually cleared via the Banco Central Ecuatoriano (BCE). Inter-bank transfers can include capital, money and foreign exchange market transactions, as well as public sector and commercial payments. Transfer instructions can be submitted via paper-based instructions or through online systems such as SWIFT.

Cash is frequently used, particularly for low-value transactions.

Debt collection

Amicable phase

Amicable negotiations are a crucial step in successful debt collection management. These negotiations are highly detailed and cover aspects including the number of instalments, write-offs, guarantees, collateral, grace periods and interest.

 

Legal proceedings

Ecuador’s judicial system comprises courts, administrative bodies, autonomous bodies and subsidiary bodies. The jurisdictional bodies responsible for administering justice are the National Court, regional courts, law courts, law tribunals and Justice of the Peace courts.

The Judicial Council is the governing body responsible for the administration, supervision and discipline of the judicial function. The judicial system also encompasses subsidiary bodies, such as notaries, auction services, foreclosure services, legal custodians and other bodies, as determined by law.

The Código Orgánico General de Procesos (COGEP), a new legal code which came into effect in May 2017, is expected to accelerate the resolution of trials.

 

Ordinary proceedings

Under the new legal code, trials can be in the form of Executive Judgments or Ordinary Judgments.

Executive proceedings are initiated by filing a written complaint with the Court. Supporting documents (such as the pagaré or letra de cambio) should be attached to the claim. Cases are assigned to a judge who then has 45 working days to decide whether the claim is complete. The judge then hands down precautionary measures within the following 60 days. The judge orders a single audience 90 days later, during which he delivers judgement.

Ordinary proceedings are initiated by filing a written complaint with the Court. The case is then assigned to a judge who has 45 working days to decide whether the claim is complete. The judge then issues a writ ordering the serving of the written complaint to the debtor. The debtor has 90 days to respond with a written defence. The judge then orders a single audience during which he will deliver judgment.

Enforcement of a legal decision

A domestic judgment becomes final and enforceable after any appeals have been exhausted. The judge of the court of first instance is responsible for enforcing judgments and issues a writ of execution ordering the relevant party to comply with the judgment within five working days. If the order is not complied with within the five-day period, the judge orders the seizure of the debtor’s assets in order for them to be auctioned off.

The Ecuadorian Civil Procedure Code sets out the requirements for the enforcement of foreign judgments, in accordance with the appropriate treaties, international conventions and Ecuadorian law. The approval procedure begins with a phase of knowledge gathering (for ordinary trials) that is performed in the defendant’s domicile court before admitting the execution. Ecuador has signed and ratified a number of international treaties for the recognition and enforcement of foreign judgments, including the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards.

Insolvency proceedings

There are two phases in Ecuador’s insolvency proceedings.

 

a) Conciliatory phase

The objective of this phase is to ensure that the debtor company can continue to operate, by putting into place signed agreements with all of its recognised creditors.

 

b) Bankruptcy

Bankruptcy proceedings entail the sale of the debtor company and its assets, with profits from the said sales being used to pay its debts to creditors.

Tetejére
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