On the way to the presidential election through Covid-19
Covid-19 hit Ecuador on March 15, when the government ordered a curfew that for most cities lasted more than 70 days. However, the Ecuadorian economy has been weak since 2019, when GDP closed with a dismal y/y change of 0.1%. In Q1 2020 it fell 2.1% q/q and 2.4% y/y – the worst declines since Q1 2016. Consumption and investment, which have been falling since Q3 2019, increased their downward trend this quarter, severely affecting the service sector at a time when it represents over 60% of GDP.
In this context, the Ecuadorian Central Bank and the IMF are estimating a GDP decrease of around 10% for 2020 – an estimate to which we cannot object. Such an economic fall would be the worst of the last three decades and will not be recovered before 2030 given that the consensus of annual growth rates for the next decade is around 1.5%-2%.
According to unofficial labor data, approximately 550,000 Ecuadorians lost their jobs between January and May, of which 260,000 were employees who contributed to the Social Security System. This large number includes not only layoffs due to the economic shut down, but also the layoffs of public servants that occurred at the beginning of the year and have added to the fall in consumption.
On the bright side, exports have continued to grow, and imports have decreased due to the economic contraction, resulting in a positive non-oil balance of trade that has offset the falling surplus of its oil counterpart. Thus, for the first time in decades, Ecuador has an overall trade surplus, which has helped to resuscitate the current account, which by Q1 increased to 1.5% of GDP.
The political developments into the presidential election set for next February are, therefore, taking place in this economic quicksand. Jaime Nebot, from the Social Christian party, ended his candidacy, while Guillermo Lasso confirmed his. These are the only certainties so far in the political arena. Both parties share the rightist side of the political spectrum, which is fragmented at this time. So is the leftist side, where no visible candidates have emerged. However, a probable large dispersion in both sides might favor any candidate endorsed by Rafael Correa, who could capture from 25% to 28% of the vote – enough to pass to the second round.
Renegotiation of the debt with private bond holders has been the most, and probably the only, positive news that the Republic has had in the past few months. A re-profiling of the Chinese debt (around $5.5b) is also being carried out by Minister Martinez. These two outcomes will make Ecuador’s fiscal future more viable if voters do not opt for a populist government in 2021.
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