• We expect that by 2018 the official growth target of 2% will be achieved, driven by higher exports, new mining projects and oil negotiations
• Deflation will be the main threat to the economic recovery as domestic demand shows no signs of improvement; we expect inflation rate around 0.5% for 2018, below official goals
• As long as political tensions remain, we do not expect fiscal measures to generate a significant impact, making it necessary to appeal to external financing
• In our opinion, Ecuadorian exports could increase 14% in 2018 due to new trade agreements with Brazil and Puerto Rico
• We believe that mining and oil will generate good results in 2018 as a consequence of new concessions and an agreement with Asian firms

2017 was an election year for Ecuador, so economic policy was highly related to political issues and the absence of deep measures to reactivate the economy predominated. However, the Ecuadorian economy overcame recession this year, according to data from the Central Bank of Ecuador with growth rates in the first two quarters of the year of 2.2% and 3.3% y-o-y respectively. Nonetheless, the improvement in economic activity was mainly driven by an increase in current spending and imports by the government, characteristics of an election period. This strategy clearly generated short-term results and did not reactivate the economy for the long term as it can be seen in the update of the Central Bank’s growth target made last week from 0.7% to 1.5%, which would mean that after the performance shown in 1H17, the economy should only grow 0.1% in the second semester to reach this goal.

• In the absence of a response from the Constitutional Court, the President convoked the popular consultation and referendum to the CNE
• The National Assembly approved the Budget for 2018 proposed by the Executive branch with no changes
• The government is carrying out projects to boost the shrimp sector as well as infrastructure and public services

As we mentioned in our last Ecuador bi-weekly report, the growing pressure on the referendum, as a consequence of the different demonstrations in favor of the consultative process, generated the necessary support for President Lenin Moreno to convoke, through two executive decrees, the popular consultation and referendum to the National Electoral Council –CNE in Spanish. The first one refers to the fight against corruption, indefinite reelection, among others and the other one is related to environmental issues and the repeal of the capital gain law.

• The Law of Economic Reactivation is facing thorough revisions to be approved, which we see is part of Alianza Pais’s work to reach consensus in the Congress
• President Moreno made political movements on his party and in his economic team to strengthen his government
• The Minister of Finance assured Ecuador has the capacity to fulfill its external debt obligations

President Lenin Moreno’s early reforms package, that intends, according to his statements, to eliminate all the negative consequences of the management of his predecessor, has somewhat struggled to follow through the path for its approval. Basically, the obstacles are related to the deep revisions and amendments that the bill is suffering after receiving a large number of critics from different sectors, in spite of some comments regarding the law pointing towards the right path. Beyond all this, we believe that the discussions on the bill have also been extended to manage to obtain a product that can gather a widespread consensus – the most possible – in the Congress, with a significant part of the efforts being placed, particularly and most-likely, within the official party itself with those followers of Lenin Moreno trying to convince the “Correistas” to maintain an united bloc and secure the approval

• The 2018 budget was sent to the National Assembly with a reduction of 5.3% in expenditure and with new financing needs of USD8.25bn
• Government is proposing a tax reform to support better results in fiscal sustainability for 2018
• After the resignation of petroleum manager, Byron Ojeda, negotiations on crude oil contracts are delayed

On November 01 President Lenin Moreno forwarded to the National Assembly the budget for fiscal year 2018. It amounts to USD34,853mn, representing a decrease of 5.3% or minus USD2bn in relation to the budget approved by congress for the current year. In detail, this draft estimates that the fiscal deficit would represent 3.9% of GDP for the mentioned year. We believe that the fact that the government has submitted a more austere budget is the first step to achieve better fiscal results for 2018, an issue we know has been one of the biggest inconveniences in the recent economic crisis.

• Ecuador had busy days recently looking for financing sources mainly to cover the fiscal gap and reinforce the international reserves. We disentangle the set of financial operations including bond issuances and gold swaps
• The government has set the financing needs at USD10bn for 2018 and, while the financing sources remain unknown, disclosed why they need such important amount
• Petroecuador is doubling on its efforts to renegotiate the oil presales’ debt, as its CEO considers that the conditions of the contracts are “inapplicable”

Last week, Ecuador sold a 10-year dollar-denominated bond for an amount of USD2.5bn and a coupon of 8.875% – it had an initial price guidance of 9.25%. These securities were rated B- and B by S&P and Fitch respectively, and even though similarly-rated countries exhibit lower coupons, the 8.875% rate is 75bps lower than that of the bonds maturing also in 2027 but issued back in February. Regarding the use of proceeds, these would only be used to finance Government programs and to refinance the existing external debt obligation on more favorable terms.