Challenging debt position poses risks to investors in Ecuador

04 February 2019

President Lenín Moreno is working to improve investment conditions in Ecuador, moderating expropriation risks. However, a challenging debt and fiscal position will contribute to elevated contractual risks, while also acting as a drag on economic growth. Mining and hydrocarbons projects will face environmental protest risks by local communities.

Security Environment

President Lenín Moreno’s plans to allow the development of and hydrocarbon projects in Imbabura, Zamora-Chinchipe and Azuay provinces will generate an elevated risk of protests by local communities. 

In May 2018 residents close to Ecuagoldmining’s Rio Blanco mine in Azuay blocked access to the site for a number of days in protest at the project’s environmental impact, forcing operations to stop. Protesters also damaged excavation equipment. Following these protests, judges ruled that the Rio Blanco project was in violation of the country’s constitution and ordered that operations stop. 

Risk have moderated somewhat under Moreno’s leadership, as he has pursued greater engagement with groups representing indigenous communities, although there continues to be an elevated likelihood of property damage as a result of protests.

War risks are generally low in Ecuador, although dissident members of the Fuerzas Armadas Revolucionarias de Colombia (FARC) operate along the Colombian border. A group known as the Oliver Sinisterra front carried out a number of attacks against Ecuadorean security forces in 2018, including the bombing of a police station in San Lorenzo, which resulted in property damage to local houses and injured 28 people. 

In response to this risk the government deployed 1,800 military personnel to border regions, leading to the capture of four alleged members of the group. The Ecuadorean government has the capacity to address the threat, but terrorism risks are likely to remain elevated in border regions in the medium term outlook.

Trading Environment

General government debt is on an upwards trend in Ecuador, rising from 22.9% of GDP in 2013 to a forecasted 47.2% in 2019. Rising debt will also drive a sizeable jump in the interest burden, which is forecasted at USD 3.4 billion in 2019, from USD 2.3 billion in 2018. 

While the government is implementing a programme of fiscal consolidation, it will take time for sovereign credit risks to recede in the country. Moreover, Ecuador faces an increasingly challenging debt maturity profile. Debt repayments of USD 4 billion are due in 2019, rising to an annual average of USD 4.6 billion in 2020-24. 

Market access remains restricted, given a persistent lack of investor confidence, and if the government is unable to materially alter this outlook, the country’s capacity for debt repayment will remain restricted.

The government’s austerity agenda will be a significant drag on economic growth in the short term outlook. In August 2018, the government announced USD 1.3 billion in spending cuts, including a reduction in the number of government ministries and the removal of fuel subsidies. 

These measures should be positive for the economy in the long-term, but in the near term will limit real GDP growth to 1.2% in 2019, given the large role of the state in the economy.

 

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Investment Environment

Moreno’s government has worked to attract foreign direct investment since 2017, after business confidence was eroded following a debt default and nationalisation of the oil sector under the previous administration. This has particularly moderated the risk of outright expropriation of assets by the government, with Moreno announcing the privatisation of 22 state-owned companies in April 2018.

However, companies operating in Ecuador will continue to face a number of elevated investment risks. In light of elevated government debt levels, the current government has shown a willingness to alter contracts and/ or break its contractual obligations in the infrastructure and energy sectors. For example, Moreno has looked to renegotiate contracts with private energy firms, seeking to increase the price paid for state-produced oil. 

The infrastructure sector has been particularly affected by payments delays. In July 2018, the CL1MdQ consortium responsible for the construction of Quito's Metro system announced that work on the project would stop, stating that government payment arrears would reach USD 180 million by August 2018. 

While a deal was subsequently reached and work resumed on the project, the incident shows that Ecuador's challenging fiscal and debt position will continue to expose investors to elevated contractual and non-payment risks in the medium term outlook.

CPS Risk Outlook Ecuador

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for DR Congo, China, Mozambique and Tanzania, all of which have been the subject of recent enquiries from JLT's client base.

CPSRO 518x542 Feb 19

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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