Previous Quarterly Editions
Expropriation Risk: 49 53 55 52 Political Violence Risk: 72 78 80 80 Terrorism Risk: 56 56 56 58 Exchange Transfer and Trade Sanction Risk: 43 43 48 48 Sovereign Default Risk: 63 65 69 65
TREND ▼ OUTLOOK ▲
COVID-19 has continued to ravage Ecuador, with the country registering over 70,000 cases and 5,000 deaths by mid-July 2020. However, it is accepted that the actual number is significantly higher. The country’s major coastal city, Guayaquil, and the surrounding province of Guayas continue to account for the majority of the country’s cases. However, the COVID-19 virus has spread throughout the country, with the central coastal province of Manabí and the northern highland province of Pichincha particularly badly affected. By the end of June 2020, it had reached the Amazonian region, raising fears that it could have a devastating impact on remote indigenous communities who have limited health care facilities. Despite this, the Moreno government started to ease its lockdown measures as soon as the rate of infection appeared to slow, using a traffic light system of red, amber and green settings for different levels of restrictions on movement, transport, and economic activity. Quito, the capital city, moved from red to amber in early June 2020 before experiencing another surge of cases in July the following month. The majority of the country has made a similar transition, although several municipalities in the coastal, highland, and Amazonian regions remain at red. On paper, the traffic light system allows for an ordered, planned easing of the lockdown. However, the authorities lack the capacity to enforce the restrictions and many businesses and workers have ignored the lockdown rules in order to generate income. As elsewhere in Latin America, the size of the informal economy and the lack of welfare support has made it impossible for low-income workers to stay at home during the lockdown and this has contributed to the spread of the virus. Easing the lockdown, including opening the country to international flights, runs the risk of triggering another spike in infections. The COVID-19 pandemic has already had a huge economic impact, and Ecuador is expected to suffer one of the steepest recessions in the region, with a contraction of more than 8% this year. While public finances have been severely impacted by the economic slowdown and the cost of tackling the pandemic, the simultaneous collapse in oil prices has reduced government revenues. The rupture of oil pipelines in April 2020, which caused significant environmental damage in the Amazonian rainforest, has brought further complications. In May 2020, President Lenín Moreno announced public spending cuts totalling four billion USD and a two-hour reduction to the working day, saying that the pandemic had already cost the country eight billion USD. This resulted in thousands of people breaking COVID-19 lockdown restrictions in Quito and Guayaquil to protest the sweeping cuts to state spending. The moves he has taken respond, first, to the conditions attached to the IMF loan agreed last year, and now the COVID-19 crisis has taken a toll on his popularity rating, which had fallen to 15% in May 2020 from 63% when he took office three years earlier. The resignation in July 2020 of his third vice president in as many years, presumably to run in the presidential election in February 2021, has further weakened Moreno, who is not standing again.
In addition to easing the lockdown, the Moreno government has introduced a series of reforms in an attempt to reignite economic activity by liberalising the heavily regulated labour market. These are largely favourable to businesses and place most of the burden of the adjustment on workers. The new legislation allows employers to negotiate a reduction in working hours and salaries while making it easier to dismiss employees. Informal employment is likely to surge as workers who have been dismissed or forced to take salary reductions try to supplement their incomes with other forms of work. The government has also announced further measures to reduce the size of the state, with the postal service, the national railway operator, and airline TAME facing cuts amid widespread reductions in public sector employment.
TREND ► OUTLOOK ▲
Although the government has been using COVID-19 restrictions to limit demonstrations, further protests are likely as trade unions and indigenous movements resist the government’s pro-business reforms. This runs the risk of fuelling social unrest, especially if the armed forces are deployed to tackle protests on the grounds of preventing the spread of the virus. Former president Rafael Correa, who remains in self-exile in Belgium, will take advantage of the crisis to stoke anti-government sentiment ahead of the 2021 elections. Confirmation of an eight-year prison sentence for corruption has ended his faint hopes of running as a vice-presidential candidate next year but he will be able to make life difficult for any Moreno-backed candidate. The severity of the economic downturn, which is likely to continue well into 2021, will increase social unrest and the prospect of political violence.
The government’s ability to combat drug trafficking, and the violence that accompanies it, will be degraded by the economic impact of the virus. Criminal networks will seek to capitalise on social unrest and the numbers of people now forced to find new ways to make a living. Conditions in prisons, which have seen several violent disturbances since the virus outbreak, will support their drive to recruit new members and expand their reach.
The Moreno government has recently introduced measures that are explicitly intended to maintain the country’s dollarisation. The IMF, which promoted the dollarisation of the Ecuadorian economy in 2000, is supporting these efforts. However, the scale of the COVID-19 crisis and the approach of next year’s elections suggest that calls to abandon the US dollar will grow if the recession deepens and persists.
In July 2020, the government reached a provisional agreement with bondholders to restructure 17.4 billion USD of the country’s 58.4 billion USD debt to extend the maturities on bonds. The deal would offer partial debt relief of 16 billion USD over the next ten years and see bondholders accept a 9% haircut on capital repayments as the government tries to retain enough money to continue servicing its debt while ensuring it has sufficient resources to tackle the pandemic. Overseas debt will continue to increase in the short and medium terms, however, and debt repayments are likely to become an issue in next year’s 2021 elections. Moreno told the National Assembly in June 2020 that government sees public debt remaining at around 57% of GDP until 2025, before gradually falling back towards the current formal limit of 40%, which has already been breached for 2020.
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