Estudos Econômicos
Ecuador

Ecuador

Population 17.0 million
GDP 6,368 US$
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Country risk assessment
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Business Climate
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 2.4 1.4 -0.5 -8.5
Inflation (yearly average, %) 0.4 -0.2 0.4 1.2
Budget balance (% GDP) -4.5 -1.2 -0.8 -0.8
Current account balance (% GDP) -0.5 -1.3 -0.5 -0.2
Public debt (% GDP) 44.6 45.8 49.1 50.0

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Significant mineral, oil and gas potential
  • Tourism potential (flora, fauna, heritage)
  • Climate diversity allows for a wide range of crops
  • Marine resources: number-one exporter of shrimp
  • Low inflationary risk due to fully dollarised economy

WEAKNESSES

  • Oil-dependent economy
  • Competitiveness subject to dollar movements due to fully dollarised economy
  • Large informal sector and low-skilled workforce
  • Legacy of sovereign default
  • State interventionism
  • Low levels of domestic and foreign private investment

Risk assessment

 

Sagging growth, affected by austerity measures and the global slowdown

Growth will return to positive territory in 2020 but activity will remain very weak. The austerity measures put in place by the Moreno government to reduce public debt are weighing on household consumption and confidence. The civil service wage freeze, the non-replacement of one in two retirements, as well as the non-renewal of occasional contracts for the State will all affect consumption. The same need to reduce public spending will constrain public consumption and state investment. The repeal of the decree to eliminate fuel subsidies and the introduction of a less ambitious tax reform project allowed for a the situtation to cool down after the widespread protest movement of October 2019. However, the possibility of a new wave of demonstrations cannot be ruled out. These political tensions, and the reduced prospect of fiscal consolidation, will lead to lower investment than envisaged following the signing of the agreement with the IMF in March 2019. The exit of OPEC from January 2020 and the resulting release of the organization’s production quotas should enable the country to increase its oil production. However, renewed tensions in the southern Amazon with indigenous communities opposing the development of oil sites in the region could undermine these projects. This would weigh on exports, which are also affected by the weakest demand in the United States, the country’s main partner, despite growth in agricultural exports (bananas, cocoa), and more particularly shrimp exports to China.

The banking and financial sector is to be reformed under the IMF agreement in order to strengthen the central bank's independence, safeguard the central bank’s credibility in maintaining full dollarisation of the economy, which was introduced in 2000, and keep inflation low. Liquidity requirements for banks should be relaxed under the IMF agreement to promote credit growth.

 

Faltering fiscal consolidation efforts and a fragile external position

In exchange for IMF financial support of USD 4.2 billion over three years under an extended credit facility obtained in March 2019, the government has committed to reducing public debt (70% external) whose share has doubled since 2013. The repeal of the decree ending gas subsidies and the new tax reform project of November 2019 have undermined these objectives. The new reform draft, presented after the rejection of the previous one, leaves aside the new export taxes and the mandatory advance on income tax for companies affected by the unrest at the end of 2019. On the other hand, the end of tax deductions for companies with an annual income of more than USD 100,000 and the special tax on the largest companies (income of more than USD 1 million) will be implemented. These measures should be insufficient to cope with the growing burden of debt service, with interest rates rising by 11.4% in the first quarter of 2019. However, the IMF’s repeated support to the government after the introduction of the new reform should allow for the disbursement of the next aid tranches following some adjustments to the objectives set initially in February 2019.

The external position will remain fragile despite the reduction in the current account deficit. More muted export growth should be offset by a contraction in imports due to lower household consumption and the fall in the price of oil, which should bring down the price of refined petroleum products imported by the country. However, remittances from expatriates are not expected to compensate for the repatriation of dividends by foreign companies, leaving the income balance in deficit. The current account deficit will be financed by foreign direct investment as well as by loans, given the very low level of reserves (less than two months of imports).

 

Growing unrest

Elected President in May 2017 to succeed Rafael Correa (2007-2017), Lenin Moreno of the left-wing party Alianza País (AP) faces a growing challenge on the domestic scene. The way that he has distanced himself from his predecessor and former ally Rafael Correa, after a referendum in February 2018 blocked the former President's chances of re-election, has wreaked havoc within the majority, where a battle rages between Correa and Moreno supporters. Meanwhile, the austerity measures put in place under the IMF agreement led to a widespread protest movement in October 2019, during which clashes between demonstrators and police resulted in several casualties. The upcoming parliamentary elections in 2021 are expected to fuel these political and social tensions further, as each side seeks to represent its interests.

The business environment remained below the regional average in 2020, with Ecuador ranked 129th out of 190, down from 2019. Investor protection, default resolution and corporate taxation are all areas where progress is expected.

 

Last update: February 2020

Payment

Cheques are still a frequently used means of payment for commercial transactions in Ecuador. Nevertheless, the use of cheques is declining, due to a growing preference for electronic payments for transactions of all values.

Credit transfers are used for both high-value and low-value payment transactions. High-value and urgent inter-bank transfers are usually cleared via the Banco Central Ecuatoriano (BCE). Inter-bank transfers can include capital, money and foreign exchange market transactions, as well as public sector and commercial payments. Transfer instructions can be submitted via paper-based instructions or through online systems such as SWIFT.

Cash is frequently used, particularly for low-value transactions.

Debt Collection

 

Amicable phase

Amicable negotiations are a crucial step in successful debt collection management. These negotiations are highly detailed and cover aspects including the number of instalments, write-offs, guarantees, collateral, grace periods and interest.

 

Legal proceedings

Ecuador’s judicial system comprises courts, administrative bodies, autonomous bodies and subsidiary bodies. The jurisdictional bodies responsible for administering justice are the National Court, regional courts, law courts, law tribunals and Justice of the Peace courts.

The Judicial Council is the governing body responsible for the administration, supervision and discipline of the judicial function. The judicial system also encompasses subsidiary bodies, such as notaries, auction services, foreclosure services, legal custodians and other bodies, as determined by law.

The Código Orgánico General de Procesos (COGEP), a new legal code in force since May 2017, should help to speed up procedures.

Under the new legal code, trials can be in the form of Executive Judgments or Ordinary Judgments.

 

Executive Proceedings

Executive proceedings are initiated by filing a written complaint with the Court. Supporting documents (such as the pagaré or letra de cambio) should be attached to the claim. Cases are assigned to a judge who then has 45 working days to decide whether the claim is complete. The judge then hands down precautionary measures within the following 90 days. The judge orders a single audience 120 days later, during which he delivers a sentence.

 

Ordinary Proceedings

Ordinary proceedings are initiated by filing a written complaint with the Court. The case is then assigned to a judge who has 60 working days to decide whether the claim is complete. The judge then issues a writ ordering the serving of the written complaint to the debtor. The debtor has 90 days to respond with a written defence. The judge then orders a single audience during which he will deliver a sentence.

 

Enforcement of a Legal Decision

A domestic judgment becomes final and enforceable after any appeals have been exhausted. The judge of the court of first instance is responsible for enforcing judgments and issues a writ of execution ordering the relevant party to comply with the judgment within five working days. If the order is not complied with within the five-day period, the judge orders the seizure of the debtor’s assets in order for them to be auctioned off.

The Ecuadorian Civil Procedure Code sets out the requirements for the enforcement of foreign judgments, in accordance with the appropriate treaties, international conventions and Ecuadorian law. The approval procedure begins with a phase of knowledge gathering (for ordinary trials) that is performed in the defendant’s domicile court before admitting the execution. Ecuador has signed and ratified a number of international treaties for the recognition and enforcement of foreign judgments, including the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards.

 

Insolvency Proceedings

There are two phases in Ecuador’s insolvency proceedings.

 

Conciliatory phase

The objective of this phase is to ensure that the debtor company can continue to operate, by putting into place signed agreements with all of its recognised creditors.

 

Bankruptcy

Bankruptcy proceedings entail the sale of the debtor company and its assets, with profits from the said sales being used to pay its debts to creditors.

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