Ecuador Infrastructure Report Q1 2013

BMI View: Based on quarterly data from the Banco Central del Ecuador, we have revised up our 2012growth outlook to 15.21%. First half real industry value has surprised, significantly to the upside -averaging 21% higher compared to H111 - however, the trend is for a deceleration and, therefore, webelieve the year as a whole will average lower. Additionally, pre-election spending, as Correa seeks toboost popularity in a country where infrastructure shortcomings are notable, is providing part of thisboost and should sustain high growth going into 2013.

Major developments in the sector: The announcement in November that Ecuador's Manta Portconcession had failed to attract any bids underscores our long held pessimistic outlook for thecountry's business environment. We had long held the view that the concession would be a toughsell, given the controversial and premature end of the previous concession. With PresidentRafael Correa set to run for a third term, we see it unlikely that any significant improvementswill be made to the business environment; this will result in the country continuing to fail toattract the private investment necessary to see tangible improvements in its infrastructure.

In September 2012, it was announced that Ecuadorian state-controlled subway operator Metrode Quito had received a total of five proposals for the construction of the first two metro stationsof the Quito subway line. The contract for the La Magdalena and El Labrador stations in thecity's central southern and central northern regions were scheduled to be awarded on October 152012. Phase 1 of the project is expected to include an investment of US$64.8mn, which will bejointly funded by Quito's municipality and the national government. The construction work onthe La Magdalena station and the El Labrador station is due to start in November 2012 andMarch 2013 respectively, with the completion scheduled to take 18 months.

In August 2012, the city government of Quito in Ecuador issued a tender to build the first twostations of the Quito subway line. The contract for the La Magdalena and El Labrador stations inthe city's central southern and central northern regions, respectively, is to be awarded by Metrode Quito on October 1 2012. The stations are estimated to cost US$64.8mn, with the firstplanned metro line of Quito requiring a total investment of US$1.4bn. The subway line willconnect the city's southern district of Quitumbe with El Labrador in Quito's northern area. Themetro will comprise 15 stations, with 18 electric trains expected to operate along the line.

Residential construction in Ecuador has surged since the start of 2011, having increased itscontribution to total construction by 6.7% through the first nine months of the year. This wasunderpinned by an increase in public housing provision and a credit-fuelled increase in privatesector developments. The government's creation of a bank designed to facilitate greater lendingto low-income families in October 2010 will have served to unlock significant pent-up demandfor new homes.

While a number of factors have boosted prospects for Ecuador's construction industry over the mediumterm, weaknesses within the country's business environment will continue to present risks and capgrowth. Chief among these will be financing. Ecuador's growth trajectory still remains heavily dependenton oil prices, which is concerning, especially given the uncertain global growth outlook. Meanwhile,political risk will continue to provide cause for concern for investors in the country, with anti-democraticnuances and populist policies at odds with attracting international investment in infrastructure. Ecuador'sPresident Rafael Correa continues to tighten his grip over Ecuador's political institutions, creating anuncertain and inhospitable climate for private investors.