Ecuador

Oxford Economic Country Briefings, Jul 3, 2008

Highlights and Key Issues

* Diplomatie relations with Colombia were suspended in the wake of the March bombing by Colombian forces of an encampment of PARC guerrillas based on Ecuadorian territory. While a bilateral accord was reached in early-June towards restoring diplomatic links, by the latter part of the month there was a setback with both sides reluctant to do so soon.

* Uncertainty continues to pervade domestic politics. The constitutional assembly under a new leader since late-June now has just under a month to meet the revised deadline for finalising and approving the draft constitution. President Correa's ruling Alianza Pais needs to reach compromises over issues contested by indigenous groups.

* Inflation accelerated to 9.3% in May from 3.3% at end-2007, pushed by food and fuel costs, and prices rose 6.3% in the first five months of the year. GDP growth is officially projected to rebound to 4.25% in 2008 from 2.6% in 2007, but we expect expansion of just 3%.

* Strong international energy prices are boosting oil export revenues and should help the mining sector recover from a 5.5% fall in 2007. oil export revenues in Q1 more than doubled from a year earlier to almost US$3bn. Exports in the first four months of the year were US$6.1 bn (oil US$4.1 bn) and imports US$4.8bn, yielding a four-month trade surplus of US$1.3bn.

Overview

Renewed tension with Colombia...

* Despite agreement on 6 June for an initial step to restore diplomatic relations with Colombia, which have been severed since Colombia's bombing in March of a PARC guerrilla camp located in Ecuador close to the border (with the killing of Raul Reyes, ranked number two in the PARC leadership), the latter part of June brought renewed tensions between the two countries. This appeared to follow comments by President Rafaël Correa in a published interview on 22 June prompting Colombia's foreign ministry to indicate there would be a deferral of plans to restore links soon. The Ecuadorian authorities then went further, pointing to an indefinite postponement and possible curbs on bilateral trade (which totals over US$2bn a year).

Constitutional assembly leader goes

* Domestic political uncertainty is also continuing. The 130-member constituent assembly elected last September overran its 23 May deadline for revision of the 1998 constitution and an extension of the assembly's drafting work was authorised to the final week of July. Progress has been slow since deliberations began in late-November 2007, despite the fact that President Rafael Correa and his Alianza Pais Movement (MAP) - an coalition of leftist and indigenous groups that originally joined to back Correa's presidential candidacy in 2006 - are driving the reform agenda. MAP holds 70% of votes and 80 seats in the assembly.

* To complicate matters further, in the final week of June, with little over a month to go before the new deadline, constitutional assembly president Alberto Acosta resigned amid major differences with leaders of the ruling party. By then, a little over a tenth of more than 500 articles had been approved at the committee stage. However, Acosta's replacement, Fernando Cordero, is attempting to press ahead with a schedule of rapid approvals -which Correa has been seeking - and overcoming delaying tactics by the opposition PSP. It remains to be seen whether Cordero is able to reconcile differences between the government and the indigenous organisation Conaie and its political wing, Pachakutik, which has five delegates to the assembly, as well as divisions among indigenous groups. A key rift is over the definition of pluri-nationality as used in the constitution draft, with Conaie urging the government to seek approval of indigenous communities before opening up their lands to development. The aim now is to get the draft approved before end-July so that plans can go ahead for a referendum.

Inflation over 9%, GDP outlook fair...

* Inflation has been largely under control since dollarisation in 2000, but price pressures have intensified this year owing to a combination of local flooding and international factors pushing up food and energy prices. Prices rose 6.3% in the first five months of the year, lifting the annual inflation rate to 9.3% in May from just 3.3% at end-2007.

* GDP growth is put by the central bank at 2.65% in 2007, down from 3.9% in 2006. The official forecast for 2008 growth is 4.25% (well above our forecast at just 3%), led by construction (up 7%), commerce (4.6%) and manufacturing (4.5%), with a 4.9% rise in the mining/oil sector (after a 5.5% fall in 2007). The most recent sectoral GDP results (as at end-June 2008) were for Q3 2007, so it is unclear how things have been developing. Partial fiscal results for January-April 2008 show a central government budget surplus of US$1.5bn, buoyed by high oil prices.

...as record oil prices lift trade results

* oil exports averaged 12.2m barrels a month in January and February, fell to 8.9m in March and rebounded to 10.8m in April. The country's crudes fetched US$77 a barrel in January, rising to US$88 in March and US$94 in April. In Q1, oil export earnings more than doubled to US$2.96bn from US$1.44bn a year earlier, with the overall oil balance at US$2.35bn (US$914m in Q1 2007). A further US$1.6bn of oil export revenues were recorded in April. Foreign companies produced 49% of total crude output of 15.3m barrels in April, with the rest by state concern Petroecuador.