Ecuador 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.
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.
The 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.
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.
Ecuador’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.