After Me, Comes the Flood

ECUADOR - Report 19 May 2017 by Magdalena Barreiro

In the past days the Assembly by mandate of President Correa cancelled all bilateral investment agreements with around 15 countries included China and the United States. The argument behind is that those agreements have brought more harm than benefits to Ecuador because of the biased ruling of international courts when legal problems arise between the country and international companies. The examples mentioned where Oxy and Chevron.

While the argument might be valid in some instances, the timing could not be worse. Correa leaves the elected president Lenin Moreno the difficult task to renegotiate those agreements and to send a positive sign to international investors and governments if he wants to increase the dismal direct investment we have received in the last 10 years.

At a time when the new government inherits a deficit that could reach $7 billion, when the Central Bank and IESS capacity to continue lending the Ministry of Finance has decreased substantially, and country risk makes domestic issues quite expensive, direct investment could be a gust of fresh air that could cool down the heat of excruciating need for financing. Especially if Moreno plans to fulfill his campaign promises which far from reducing public expenditure will increase them.

Amidst the difficult fiscal situation, there are signs of recovery coming mainly from the external sector. Non-oil exports increase by 16% y/y in Q1 2017 compared to the negative change of 24.4% in 2016. Imports are also up by 16% (including oil imports) versus a decrease of 36.2% in 2016. Therefore, the non-oil balance of trade deficit increases slightly by $20 million, but the overall balance of trade is still positive at $473 million thanks to oil exports that jump from $896 million in Q1 2016 to $1667 million in 2017.

The IRS also reports that taxes are up 9% y/y between January and April 2017 without considering tax increases established to finance the earthquake expenditures. But, the $4862 million raised in this period are still 3% below the IRS target for Q1 2017.

Despite the government raised financing close to $5 billion in Q1 2017, international reserves continue at a low level of $3038 million which covers only 61% of total financial reserves and 80% of private banking reserves.

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