A brighter economic outlook amid high political risk

ECUADOR - Forecast 20 Oct 2020 by Magdalena Barreiro

This year we have assumed the inevitable. GDP will fall between 10% -11% by the end of the year, as it has already fallen 9.97% q/q and 12.4% y/y in Q2 2020. Household consumption fell 11.9% y/y and government consumption was also down, by 10.5% y/y, in Q2. Exports, which until Q1 contributed positively to GDP, declined 15.7% y/y, and almost all industrial sectors showed negative growth rates, with the exception of mining, shrimp and agriculture, which registered marginal positive changes.

The Ministry of Finance expects the largest fiscal deficit of the last 20 years for the General Government at over $8b, although our estimate is more optimistic and places this result at $6.5b if we do not include the $1060 million of cash external interest payments that are not due this year.

On the bright side, between January and August we saw a positive balance of trade of $1965 million, thanks to a combination of nominal growth in non-oil exports, which for this period rose 7.4% y/y, and to a decrease of 25% in imports due to the economic contraction and low international derivatives prices.

Also, according to recently published information from INEC, around 470,000 Ecuadorians have recovered a lost job, compared to the 1,000,000 who were unemployed as of June this year. Finally, the banking sector remains resilient to the harsh macroeconomic conditions, and deposits grew 11% y/y by September 2020. Total credit still shows signs of the economic downtrend, with a small increase of 0.3% m/m but with a still negative change of 2.3% y/y.

A significant improvement in pandemic trends in the past few months, the renegotiation of external private debt that is providing critical cash relief to the fiscal accounts, and the agreement with the IMF, which has already produced a first, desperately needed disbursement of $2,000 million, all indicate a brighter scenario for Ecuador.

However, we have presidential elections coming in February, and as we have stated before, we believe political risk tops the list of Ecuador’s many risks. Over 50% of Ecuadorians have not yet decided for whom to vote, and there is a battle among the polls, which show quite contradictory results depending on their political inclination. But amid this bewilderment, it is clear that Andres Arauz, the Centro Democratico candidate (backed by Correa), and Guillermo Lasso of Creo have the highest probability of reaching the second round of the presidential election.

The indigenous movement led by Yacu Perez is emerging as a third political force and might very well determine the fate of the above-mentioned second round. This truly concerns us, but in the meanwhile, we hope for the best.

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