Mislead and Succeed
The government has played a masterful hand, using the Odebrecht scandal regarding bribes paid to Ecuadorian government officers to cover up the more costly case of Petroecuador, in which top officials such as Carlos Pareja Yanuselli are involved.
Ecuadorians seem to be more preoccupied with the economic situation and seem to be pretty much accustomed (indifferent, even) to the corruption evidence. Recent polls show that corruption scandals occupy a low fourth or fifth place as urgent problems to solve. This also explains why the opposition candidates have not exploited this opportunity as expected. Thus, those hoping that corruption will bear against the official candidate might end up highly disappointed in February.
Economic information suffers from inconsistent support as well. While government officials insist on the recovery of the Ecuadorian economy in Q3 and Q4 2016, the evidence speaks of another reality. In fact, Q2 and Q3 recovered from the low Q1 rate of negative 1.7%, and showed positive changes of 0.7% and 0.5%, respectively, but all three quarters showed negative y/y growth rates, and the recession went deeper, as Q2 2016 decreased 2.2% versus 1.2% in Q2 2015, and Q3 fell by 1.6% in 2016 versus 0.8% in 2015.
Thus, the official estimate of -1.7% GDP growth for 2016 requires strong growth of 1.1% y/y in Q4 2016. For 2017, the Central Bank estimates positive y/y growth of 1.4%, also based – in our opinion – on inconsistent fundamentals. Official estimates for household consumption are negative at 0.8% as well as for investment (-5.2%).
With this in mind, the positive change for 2017 would be based on a strong y/y increase in exports (12%), which cannot be sustained by the EU trade agreement alone, or by higher oil prices. Other elements of GDP (where VAT taxes are registered) would grow y/y by 14% – a miraculous recovery from 2016.
Nor does the labor sector bring good news in 2016. Full employment falls from 46.5% in Q4 2015 to 41.2% in 2016, or 239,000 jobs lost, increasing the vulnerability of the economy. And the average y/y difference for the five largest cities is as high as -8.7% in the same period.
Finally, the deficit for 2016 will be around $7.5b (7.5% of GDP). Even though in 2017 capital expenditure needs might fall given the completion of the hydroelectric projects, we do not foresee a deficit of less than 5% of GDP.
The above will not ease the financing requirements this year, and since Minister of Finance Patricio Rivera has declared no more bond issues will be carried out until May, the new government will face a very demanding cash flow management panorama in H2 2017.
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