Thumbs up from the USA, thumbs down from Venezuela and Bolivia
The Ecuadorian economy decreased 0.7% q/q in Q1 2018, but still grew 1.9% y/y (the lowest positive change since Q1 2016). The slowdown in recovery that started in Q3 2016 can be linked to a sharp decrease in public expenditure, which in Q1 2018 fell $2.63b q/q and $348m y/y. There was also a contraction of $1b between H1 2017 and H1 2016.
The adjustment has been made in capital expenditure, while current expenditures increased $179 million by the end of June of 2018. As a result, the overall balance is $1606 million lower than that of Q1 2017 (falling from -4.19% to -1.01% of GDP), and the primary balance is positive at 1.66% of GDP. The government expects to end 2018 with an overall deficit of approximately 4% of GDP and a primary deficit of around -0.5% of GDP.
Together with controlling expenditures, the government has been cautious so far in its financing choices. Domestic debt fell by $794 million as of May 2018 from 2017, while foreign debt increased by just $2631 million despite the issuance of $3.0b in January 2018. If we include $650 million of short-term domestic financing issued in June, and $400 million received from FLAR, the net reduction in domestic debt in H1 is $144 m, and the increase in foreign debt is just $3030 million.
Lower public expenditures translated into lower demand, which fell 0.3% q/q and grew 3.9% y/y – also the lowest change since Q4 2016. Exports, on the other hand, recovered from a poor performance in Q4 2017 (0% q/q and 0.4% y/y growth) and are up 0.6% q/q and 1.1% y/y.
Commerce, construction, manufacturing, agriculture, and utilities made positive contributions to GDP in Q1 (0.08%, 0.07%, 0.05%, and 0.03%), while public administration, professional activities, transportation, oil refining and oil and mining showed negative contributions (0.17%, 0.12%, 0.06%, 0.06%, 0.18%).
Ecuador´s relations with the USA were boosted by the recent visit from Vice President Mike Pence, who praised President Moreno for his different leadership style, as well as by the visit from the IMF. Although we remain skeptical about the probability of signing a formal agreement with the IMF, there are clear signs of a change of gears from the government – even on the part of leftist Vice President Maria Alejandra Vicuña, who recognized that “the IMF is not what it used to be”.
On the other hand, relations with Venezuela and Bolivia took a negative turn, to the point of recalling the Ecuadorian ambassadors from Caracas and La Paz, when both presidents accused Moreno of interfering with justice in the case against Rafael Correa for the kidnapping of politician Fernando Balda. They declared Correa a “political victim”.
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