Country risks for investors operating in Ecuador

04 November 2019

Country risks for investors operating in EcuadorEcuador will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.

An agreement to end weeks of protests should reduce the likelihood of disruptive civil unrest in the near term.

However, recent incidents are likely to slow implementation of austerity measures, generating uncertainty over the future of an IMF program.

Security Environment

In October 2019, Ecuador experienced 11 days of civil unrest, following the government’s decision to repeal fuel subsidies as part of its engagement in an IMF program. Protests, which were primarily organized by the Confederation of Indigenous Nationalities of Ecuador (CONAIE), led to significant business disruption.

On October 9, 2019, state oil company Petroecuador declared force majeure on its oil trading operations, and suspended operations on the TransEcuadorean Pipeline System.

This followed occupations of key sites. On October 8, the government estimated that production was reduced by 213,000 barrels per day, nearly 40% below average daily rates.

Moreover, the government’s seat of operation was temporarily moved from Quito to Guayaquil, after protesters seized the National Assembly, and carried out roadblocks, looting, and arson attacks.

At least seven people were killed during the unrest.

On October 13, 2019, the government and CONAIE agreed to end protests.

Country risks for investors operating in EcuadorThe agreement includes the restoration of fuel subsidies and plans to form commissions to establish alternative methods of fiscal consolidation. In the near term, the agreement will ease the risk of civil unrest in Ecuador.

However, if additional talks collapse in the coming weeks, Ecuador will likely experience renewed unrest.

The agreement is also likely to reduce pressure on President Lenin Moreno to step down, whose term is due to end in 2021.

Trading Environment

The initial decision to remove fuel subsidies formed part of a broader fiscal reform agenda following Ecuador’s engagement in a US$4.2 billion IMF extended fund facility (EFF).

The agreement with CONAIE to restore subsidies will generate uncertainty over the IMF’s continued engagement with the country.

Despite the October 13 agreement, including pledges to find alternative spending cuts and tax increases, the pace of reform is now likely to be significantly slower.

Moreover, CONAIE has demonstrated its ability to influence government policy, and may use the threat of protests to disrupt additional government austerity measures.

This may result in delayed or reduced disbursements from the IMF.

The EFF has supported Ecuador's ability to meet its financing needs, covering approximately two thirds of obligations in 2019.

As a result, disruption to the program would likely contribute to elevated sovereign risks.

The end of protests should allow activity in the oil and gas industry to return to normal in the coming weeks. However, recent political instability may affect investor confidence in Ecuador, generating additional headwinds to economic growth in the medium term.

The growth outlook in Ecuador is already weak, with real GDP forecast to grow by just 0.2% in 2019. Moreno’s program of cuts to public spending should improve long-term fiscal sustainability, but could affect investment and consumption in the near term.

Investment Environment

Pricing Outlook EcuadorEcuador’s engagement with the IMF should reduce incentives for the government to pursue contract alterations in the oil sector.

However, projects located close to indigenous communities will continue to face an elevated risk of project alterations and cancelations.

Environmental opposition to projects among communities in Loja, Morona-Santiago, and Zamora-Chinchipe will ensure the risk remains elevated in these areas.

Expropriation risks are generally lower under Moreno, than under his predecessor Rafael Correa.

Under the Correa administration, the Ecuadorean government had seized assets belonging to oil companies that did not renegotiate state contracts. However, Moreno is likely to continue engaging with the private sector in hydrocarbons and mining.

For example, in April 2018, 22 state-owned firms were privatized, allowing greater private sector participation in key sectors.

5 Key Takeaways

  • In October 2019, Ecuador experienced 11 days of civil unrest, following the government’s decision to repeal fuel subsidies as part of its engagement in an International Monetary Fund (IMF) program.
  • On 13 October, 2019 the government and indigenous activist group CONAIE reached an agreement to end protests. In the near term, the agreement will ease the risk of civil unrest in Ecuador.
  • Progress on fiscal reform is now likely to slow significantly, given that the agreement to end protests includes a pledge to restore fuel subsidies. This will generate uncertainty over the IMF’s continued engagement with Ecuador, elevating sovereign credit risks.
  • Following the agreement, activity in the oil sector is expected to return to normal, although recent instability may weigh on investor confidence.
  • Ecuador’s engagement with the IMF should reduce incentives for the government to pursue contract alterations in the oil sector.

The monthly Risk Outlook is supported by our 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.

Signup WRR

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Indonesia, Sri Lanka, Saudi Arabia and Gabon and all of which have been the subject of recent enquiries from our client base.

  • TALK TO AN EXPERT

  • DOWNLOAD AND SHARE

  • SIGN UP

  • Eleanor SmithEleanor Smith

    Eleanor Smith is a Senior Political Risk Analyst within Marsh JLT Specialty’s Credit Specialties team. At Marsh JLT Specialty, Eleanor analyses developments in political risks, and advises clients on their effect in a range of sectors. Eleanor is also responsible for delivery of World Risk Review, JLT’s country risk ratings platform, to clients and prospects.


    Eleanor has a first-class degree in History with Spanish from UCL, and a Masters in International Public Policy from the same institution. With experience in a range of sectors, including diplomatic missions and not-for-profit, Eleanor can help clients understand their risk exposure.

    If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)20 8108 9544.

  • For more articles like this, download our Risk Outlook Newsletter

    Share this article

     
  • Get everything you need, delivered straight to your inbox.

    Sign up to receive our latest news and insights here.

DISCLAIMER

Services provided in the United Kingdom by Marsh JLT Specialty, a trading name of Marsh Ltd and JLT Specialty Limited (together “MMC”). Marsh Ltd is authorised and regulated by the Financial Conduct Authority for General Insurance Distribution and Credit Broking (Firm Reference No. 307511). JLT Specialty Ltd is a Lloyd’s Broker, authorised and regulated by the Financial Conduct Authority for General Insurance Distribution and Credit Broking (Firm Reference No. 310428).

This is not legal advice and is intended only to highlight general issues relating to its subject matter. Whilst every effort has been made to ensure the accuracy of the content of this document, no MMC entity accepts any responsibility for any error, or omission or deficiency. The information contained within this document may not be reproduced. If you are interested in utilising the services of MMC you may be required by/under your local regulatory regime to utilise the services of a local insurance intermediary in your territory to export insurance and (re)insurance to us unless you have an exemption and should take advice in this regard.