Economy: A Difficult End To 2015 And Scenarios For 2016

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Several indicators make up a complex situation for Ecuador’s economy in 2016. According to various analysts and international estimates, it is possible that next year’s economic downturn will be of great magnitude, affecting issues such as employment and the population’s income. There are also doubts over where the Government will find the funds to end the year.

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Plan V

Oil remains key
The most important indicator at this juncture is the international price of oil. Ecuador depends heavily on oil revenues and this figure is key to understanding the economic situation. In this context, international consulting studies predict that, with a global oversupply of crude, oil prices could remain low for the next 15 years. It is estimated that the 2016 price for Ecuadorian crude, previously sold at USD 100 per barrel, will not exceed USD 40 per barrel, which is the figure used in the General State Budget.

The country currently produces at least 538,000 barrels per day, a figure which stabilized after a steady decline in domestic production. In 2016, it is estimated that production from the ITT field will see this figure rise by at least 10,000 barrels. This year, oil exports have declined by 59% compared to the same period in 2014 and analysts expect the trend to continue in 2016.

Another important indicator is trade balance. The appreciation of the dollar forced the Government to impose tough trade restrictions aimed at preventing the outflow of currency and increasing the trade deficit. This policy, which includes measures such as safeguards, is expected to be relaxed in the second half of 2016.

The measures taken by the Government, in addition to arousing suspicion in the World Trade Organization, have affected neighboring countries such as Peru and Colombia. It is estimated that in 2016 the foreign trade situation will be similar to this year, with a current account deficit of at least USD 3 billion.

These difficulties impact the major economic indicators. Thus, according to the International Monetary Fund (IMF) Ecuador will close 2015 with a 0.6% economic downturn. With regard to GDP per capita, it is estimated that 2015 will close with a drop of 3.3%, which places it at USD 6,086.

Politics and economics
In other economic sectors, meanwhile, there have also been developments. The agricultural sector closed 2015 with an annual growth of 0.6%, whilst construction showed an obvious slowdown, from 12% to a maximum of 3.5% by the end of 2015.
The political situation, in any case, will affect the economic decisions made in 2017.

The announcement that President Rafael Correa will not run for re-election does not mean that Alianza PAÍS will relinquish power. Therefore, the ruling party will be taking economic measures which affect the political process.

According to international analyzes, as election year approaches, it is likely that the Government will avoid taking severe adjustment measures and, on the contrary, will seek to stimulate growth with externally financed investment. However, these same analyzes conclude that, in order to achieve this, the Government must rely on a recovery in oil prices, cuts in public spending and the completion of key projects.

Without these three factors, the country could fall into a new moratorium on its debts, which could jeopardize dollarization.

According to IMF estimates, 2016 will not see an increase in public spending, but in tax revenues, as a result of the reduction in fuel subsidies. The IMF also predicted that the reduction in public spending will mean that there will be no economic growth in 2016.

The favorable economic factors identified by analysts for 2016 include the beginning of the exploitation of the ITT oil field; the operation of the renovated Esmeraldas refinery; and the income from hydroelectric plants, among others.

However, there are also disadvantageous factors, such as the ruling in the OXY case, which ordered the government to make a multi-million dollar compensation payment; the impact of El Niño on the coastal provinces; and a possible eruption of Cotopaxi in the Sierra, among others.

Adjustment conditions
According to estimates by analysts from the USA, it is possible that wages and prices should fall, which could cause unemployment of over 20%. Given the impossibility of wage reduction, a decrease in non-tradable prices would also be necessary. Despite dollarization, inflation stands at 3.8%.

Other indicators, such as unemployment, are not encouraging. It is estimated that unemployment has risen by 24.1% and inadequate employment by 12.3%.

Are bank reserves at risk?
Analysts consulted by the magazine PLAN V quantified that, by law, the banks must deposit reserves of at least USD 3.506 billion in the Central Bank. Although it is not yet known what the situation will be in 2016, the fact is that in December the Government must pay civil servants USD 1.2 billion, to which must be added at least USD 650 million in bonus payments. In total, to end the year, the Government needs at least USD 3 billion. However, it is understood that the National Treasury holds just $251 million.

With its usual opacity, the Government has not shared the results of its efforts to seek resources abroad. Although Finance Minister Fausto Herrera traveled to Beijing in search of money, and former Petroecuador president Carlos Pareja proposed an oil-for-credit deal in the US, it is not known whether these funds have reached the country.

For the banking sectors, the Government could temporarily use the resources that the banks have in the Central bank but this move would be challenged on the basis that these funds belong to depositors.

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