The Ecuadorian Paradox

October 11, 2013

Correa’s management of the economy has surprise both friends and enemies alike

The Ecuadorian economy is something of an anomaly. A strategic default engineered by President Correa in 2008 helped slash the country’s debt pile but it also cut Ecuador off from international capital markets. At the time, many pundits predicted a crisis yet the opposite has happened. In the years since Ecuador has been one of the fastest-growing Latin American economies. Indeed since 2011 its growth has averaged more than 6%, compared to 3.5% average in the rest of the region.

But recently the president of Ecuador’s Central Bank, Diego Martínez, suggested that growth would slow to 4%. That may well be the sort of growth that Bank of England governor Mark Carney would love to have but it has led some to ask if Ecuador’s boom is finally coming to an end. Well one of the supports for the Ecuadorian economy has been the high oil price. Oil has generally traded at more than $100 a barrel since 2008, helping Ecuador, which is OPEC’s smallest member, boost export revenues.

There has been a similar, if less talked about, increase in food prices. Ecuador is brimming with agricultural produce, so it has also benefited from the price rise in ‘soft’ commodities such as shrimp and banana. Guessing future price movements is a fool’s errand but given that commodity price peaks are generally followed by troughs it seems fair to say that Ecuador can’t rely on good prices forever.

One way Ecuador has got around not being able to access international capital markets is by selling future oil to China. The details of these deals have not been fully clarified but some sources suggest that up to 80% of future production until 2018 may have been mortgaged in this way. If true, that means Ecuador’s position could be weaker than it looks.

Another strategy switch?

But there are several signs that the government is changing economic policy to stave off any crisis. One is that Ecuador has taken some significant steps to boost oil production. It has decided to open up the Yasuni National Park for development and launched international investor roadshows to attract foreign capital and expertise.

At the same time Correa is also trying to diversify the economy. A new mining law is hoped to attract investment in that area while the Government is investing heavily in a ‘knowledge city’, to develop Ecuadorian expertise technology and engineering. Budgetary changes also suggest that Correa is tinkering with Ecuador’s economic model. In the first six years of power he almost doubled government spending and turned Latin America’s lowest spending government into its highest. Now there are signs he is starting to cut back. The social department has reduced staff while the country’s generous fuel subsidy may be cut. Whether these changes are enough remain to be seen but no-one could accuse the government of being asleep at the wheel. The next year should prove an interesting one for the Ecuadorian economy.