Previous Quarterly Editions
Expropriation Risk: 57 61 61 62 ► Political Violence Risk: 57 57 51 51 ► Terrorism Risk: 58 58 59 59 ► Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 47 47 57 57 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
At the COP26 global climate summit in November 2021, President Guillermo Lasso of Ecuador announced plans to create a new marine protection area around the Galapagos Islands. The proposals seek to extend existing protection zones and create a corridor of protected waters through to Costa Rica. After announcing the plans, Lasso said Ecuador is “a pioneering force in environmental protection”.
However, his economic agenda suggests otherwise, especially his plans to develop the oil and mining sectors. In July 2021, the president announced plans to increase investment and production in the oil sector, setting the objective of attempting to double national oil production during his presidency. He hopes to achieve this by providing fresh financial incentives for overseas oil firms and expanding the oil frontier in the Amazonian region.
The president has stated that the expansion of the oil sector will not come at the expense of the Amazon. However, increasing the oil frontier will accelerate deforestation through the construction or expansion of oil and transport infrastructure. Expanding oil production will also increase the risk of pollution, as recent oil spills in the Amazonian region demonstrate.
Amazonian indigenous communities and movements are particularly concerned about the impact of Lasso’s plans on their habitat and livelihoods. The president’s plans to develop the mining sector have also caused alarm among environment and indigenous movements. In August 2021, Lasso set out the contours of his mining policy in an executive decree, identifying the sector as a key site for investment and growth.
The president is seeking to create a more favourable environment for overseas mining firms to operate, including reducing regulation and introducing new financial incentives. Environment and indigenous movements and local communities fear industrial mining projects will be rushed through without the completion of full environmental reports, including the assessment of the impact on water supply and quality and biodiversity.
Concerns over water are particularly acute in the highland region, as many medium and large-scale mining projects are located close to important water sources that provide drinking water to towns and cities and irrigation water to agricultural producers. Climate change is intensifying fears about water supply as Andean glaciers have retreated in recent decades.
Popular consultations will continue to be used to resist medium and large-scale mining. In February 2021, over 80% of voters in the southern highland canton of Cuenca voted against the development of mining in the region. The strong performance of the environmental activist Yaku Peréz in the 2021 presidential
elections shows the level of popular support for environmental protection.
Ecuador has been affected by devasting floods and landslides in the opening months of 2022. In the capital city, Quito, at least 28 people were killed by a landslide after intense rainfall, while severe flooding took place elsewhere in the highland region. The floods suggest the Lasso government will have to invest significantly in infrastructure to prevent against further destruction amid shifting climatic conditions.
Lasso’s election victory buoyed international investors and further reduced the risk of expropriation. His opening months in office have demonstrated his desire to attract and protect international investment. He has announced a series of liberal economic reforms and pushed for the rapid full integration of Ecuador into the free-trade block, the Pacific Alliance. Lasso also re-entered Ecuador into the state-investor dispute mechanism the International Centre for Settlement of Investment Disputes, which will give overseas investors greater assurances. The close relations Lasso has established with the International Monetary Fund (IMF) will also give investors greater confidence.
The greatest risk to investment remains in the mining sector, due to strong environmental and anti-mining movements and popular opposition to industrial mining.
Lasso’s relatively high approval ratings in the opening months of his presidency have deteriorated in recent months as insecurity has worsened and economic conditions have remained precarious. Protests have taken place against his government, but these have been relatively small-scale and non-violent. However, there is the possibility of large-scale mobilisations in the coming months as Lasso attempts to drive through his liberal economic reforms.
Divisions have emerged within the indigenous political party, Pachakutik, and the Union for Hope coalition, which is aligned to the former president, Rafael Correa. The splintering of the opposition has supported Lasso and helped him win sufficient support in the National Assembly to introduce a major tax reform. However, he lacks strong organised political support, which makes him vulnerable.
The risk of violence and extortion is particularly high in the coastal region as this is where drug cartels and street gangs are the most active. Zones along the Ecuador-Colombia border remain precarious, especially the provinces of Esmeraldas and Sucumbíos.
Criminal networks connected to international drug trafficking remain very active and the security situation is precarious, especially in the coastal region. There was another prison massacre in November, which left at least 68 prisoners dead. Struggles between cartels and gangs have spilled over into the streets and crime and violence have spread. Dead bodies have been seen hanging from bridges in the port city, Guayaquil, raising fears of a further escalation in violence.
Rising poverty will support efforts to recruit new members into criminal networks, which are fighting to control lucrative drug trafficking routes to the U.S. and Europe. Lasso’s initial response to the prison and crime crisis has been inadequate, raising fears that crime and disorder will escalate out of control.
Lasso is a staunch defender of dollarisation and will support measures to retain the monetary policy, which has been in place since 2000. A law explicitly aimed at protecting dollarisation and the autonomy of the central bank was approved by the National Assembly in late April 2021.
During a visit to China in February 2022, Lasso and Chinese President Xi Jinping signed a memorandum of understanding to negotiate a trade deal between Ecuador and China. The agreement is expected to be completed by November 2022. Lasso also hopes to sign a trade agreement with Mexico, which will facilitate entry into the Pacific Alliance, and continue to strengthen trade relations with the U.S..
Higher oil prices, partly due to the Russia-Ukraine crisis, and increased foreign-direct investment will support the balance-of-payments, further reducing the risk of trade restrictions.
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The public finances have strengthened as economic growth and tax collection have picked up. Higher oil prices in late 2021 increased government revenues. Recent price increases due to the Russia-Ukraine crisis will bring further relief and help the Lasso government reduce the budget deficit. Lasso has stated that higher oil prices will mean his government will not have to find extra overseas financing this year. His government will continue to draw on credit lines from the IMF, World Bank and other multilateral institutions. Despite the recent improvement in the public finances, the rapid build-up in public debt over the last five years and the fragility of the domestic and international economy remain sources of concern.
