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Ecuador Country Risk Report Q2 2016

Ecuador Country Risk Report Q2 2016

Core Views

The persistent weakness in oil prices will dampen Ecuador's hydrocarbonsector production growth, weighing on both economic growthand government revenues in the years ahead.

Ecuador's balance of payments dynamics will come under sustainedpressure in the coming years. Low oil prices and uncompetitivemanufacturing sector exports will widen the current account balance.

Meanwhile, deteriorating economic prospects within the extractivesector will dampen foreign direct investment, straining the financialaccount.

Social unrest will rise in the years ahead as the government increasesfiscal consolidation and limits minimum wage hikes during a period ofsubdued economic growth. The country has a long history of protestsagainst extractive sector activity and the economic slowdown willonly add to this.

Major Forecast Changes

We have downgraded our real GDP growth estimates and forecastsfor 2015 and 2016 from expansion of 1.6% and 1.8% respectively,to contractions of 0.8% and 0.9%. We expect oil price weaknesswill lead to contraction in fixed investment.

We have revised down our fiscal forecasts, and now expect shortfallsof 7.9% of GDP in 2015 and 8.6% of GDP in 2016. We highlight thatthe non-oil revenues and the government's efforts to limit spendingwill not be able to offset the decline in hydrocarbon sector income.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Recession Will Extend Through 2016
Ecuador's recession will continue in 2016 as weak oil and gas investment erodes fixed capital formation and weakens the labour market.
Thereafter, Ecuador will only experience modest levels of growth as the dollarisation of the economy limits its ability to rebalance away
from dependence on oil exports.
GDP By Expenditure Outlook
TABLE: 10-YEAR GDP FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORT FORECASTS
Fiscal And Public Debt Outlook
Deficit Set For Significant Widening In 2016
Ecuador's fiscal deficit will expand significantly in the years ahead as revenue contracts for a second consecutive year in 2016 and the
government fails to follow through with proposed spending cuts. The government will finance the growing shortfall through issuing new
debt on international markets, risking a deterioration in sovereign credentials as interest payments grow.
Structural Fiscal Position
External Trade And Investment Outlook
External Imbalances Could Force De-Dollarisation
The probability of a de-dollarisation of the Ecuadorean economy in the coming years is growing as a change in currency regime could
become the path of least resistance for a necessary rebalancing of external accounts. Low oil prices will widen the current account
deficit while foreign direct investment will wane, putting the government on an increasingly unsustainable path of financing the external
shortfall through debt issuance.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP FIVE GOODS IMPORTS IN 2014
TABLE: TOP FIVE GOODS EXPORTS IN 2014
Chapter 2: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Political Landscape To Shift Following Correa's Exit
Ecuadoran President Rafael Correa will not run for a third consecutive presidential term in 2017 even as local sources have begun to
suggest that the president will attempt to circumvent constitutional regulations on term limits. Without Correa on the 2017 ticket, the
ruling Alianza PAIS will likely suffer modest losses as coalition cohesion will be undermined.
TABLE: POLITICAL OVERVIEW
Chapter 3: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE RISK
Vulnerability To Crime
Chapter 4: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: ECUADOR – MACROECONOMIC DATA & FORECASTS

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