Security and fiscal challenges weigh on growth
Ecuador's economic growth is expected to slow in 2024, largely due to deteriorating security conditions, which will affect private consumption (around 62% of GDP) and gross fixed investment (21%). The projected slowdown in consumption is linked to rising drug-related gang violence, exacerbating existing public concerns about homicide rates. The events of January 2024 in Guayaquil, which saw the leader of the country's main criminal group escape from prison, triggering a series of terrorist attacks and culminating in the government’s state of emergency decree, have further undermined consumer confidence and added to economic challenges. Moreover, rising fiscal pressures led the Noboa government to approve a temporary VAT increase from 12% to 15% to fund the fight against organised crime, and these pressures will probably prompt government spending cuts (15% of GDP), except for security measures, such as cuts in fuel subsidies from Q2 (estimated at 2.6% of GDP in 2022). All of these are likely to further damp private demand. Last, Ecuador's oil production is likely to be significantly affected by the ban on oil drilling in the Yasuní National Park, approved by a referendum in 2023, as the closure of the Ishpingo-Tambococha-Tiputini (ITT) oilfield, Ecuador's fourth-largest, accounts for 15% of Ecuador's oil production. This cut in oil production is likely to have a negative impact on the labour market in the short term, which will translate into lower employment and lost wages.
Fiscal deficit should remain high to support security spending
The current account is expected to switch to a deficit in 2024, mainly on back of a contraction in net exports, with the pace of decline in exports due to lower oil production following the closure of the ITT oilfield and falling global commodity prices outpacing that of imports. Meanwhile, the secondary income surplus (4.1% of GDP in 2022) is expected to decline as expatriated workers' remittances from the US, Spain and Italy weaken somewhat in light of the expected deterioration in job markets. Conversely, the services deficit (-2.3% of GDP) is expected to widen as inbound tourism should be affected by the crime wave. Last, the primary income deficit (-1.6% of GDP) should remain relatively stable. On the financing side, FDI will remain low due to economic, legal, and political uncertainty. Moreover, foreign exchange reserves ensured only 2.5 months of import cover in March 2024, but should increase during the year in view of the fresh agreement signed with the IMF in April 2024.
Regarding the fiscal accounts, the budget balance deficit should widen in 2024 as more sluggish activity leads to revenue losses and the general elections planned for 2025 discourage austerity measures. In addition, the ban on drilling in the ITT oil field will aggravate this outlook as the government expects losses of USD 13.8 billion in revenue over the next 20 years. Finally, the spending side will not bring relief in the short-term with pressures arising from increasing salary expenses, higher debt servicing costs and increasing spending to tackle the ongoing crime wave. That said, the agreement signed in April 2024 to underpin a USD 4 billion four-year Extended Fund Facility with the IMF should provide some fiscal sustainability in the coming years. Multilateral lending (including the World Bank, CAF, Inter-American Development Bank, in addition to the IMF) will remain the main source of financing. Gross public debt, 74% of which is external (48% owed to multilaterals and 38% to markets), is expected to stay on an upward trend as the county struggles with weak growth and the primary budget deficit remains wide.
Political and diplomatic instability on the rise
President Daniel Noboa's administration faces a troubled political environment in 2024. Noboa, of the National Democratic Action Alliance (ADN) party, was sworn in after winning a tumultuous election in October 2023. The process took place after the former president Guillermo Lasso invoked the “mutual death” – a constitutional mechanism that dissolves the National Assembly and triggers new elections for both the executive and legislative branches – as he faced impeachment proceedings. The campaign period was marked by an anti-Correism sentiment that was boosted after the murder of Fernando Villavivencio, a presidential candidate who persistently was a critic of the administration of Correa and was assassinated in Quito following a campaign rally. While Daniel Noboa is committed to conventional macroeconomic policies, he faces hurdles to implement deep structural reforms during such a short term of office (general elections are scheduled for May 2025) as the National Assembly remains highly divided. His National Democratic Party holds only 14 out of 137 seats in the National Assembly, while the opposition, Citizen Revolution Movement, still has the highest number of seats (51). Given this political landscape, he is having difficulty in creating coalitions with other parties to push his agenda through the National Assembly.
The difficult security situation, exacerbated by rising drug gang warfare since Ecuador became an export hub for cocaine produced in Peru and Colombia and trafficked through Guayaquil, prompted Noboa to declare a state of emergency. In April 2024, the referendum aimed at giving the security forces (military and police combined) more authority to apprehend and prosecute criminals produced a mixed result. Overwhelming public approval for the security- and crime-related questions (9 out of 11) confirms the strong support for President Noboa's security policies. However, high disapproval regarding the labour and international arbitrage questions may signal obstacles ahead in passing economic reforms and difficulties in articulating and communicating them. Furthermore, the administration is facing challenges in securing legislative support for fiscal measures aimed at combating organised crime. Recent approval for a temporary increase in the VAT rate from 12% to 15% to fund the fight against organised crime, does not appear to be enough to fund anti-drug efforts and reduce the deficit at the same time. That said, with lack of public support and elections looming, there is little incentive for the National Assembly to support further austerity measures.
Regarding foreign policy, in April 2024, a group of Ecuadorian police officers stormed the Mexican embassy in Quito to arrest Jorge Glas, who served as Ecuador's Vice President between 2013 and 2018. An ally of former President Rafael Correa, he was convicted of corruption and had been a refugee in the Mexican embassy since December. Several Latin American countries, as well as the United States and Canada, consequently condemned this action, signalling the country's diplomatic isolation in the region. Following the exfiltration operation, Mexican President Andrés Manuel López Obrador ordered that diplomatic ties be severed and asked the International Court of Justice to suspend Ecuador as a member of the United Nations. Last, the country is pursuing its trade liberalisation efforts by negotiating free trade agreements with other trade partners.