• GDP expanded 2.6% y-o-y in 1Q17. We believe results for the 2Q17 will be fundamental to determine the economy’s path as particular domestic risks persist
• Inflation reached 0.16% y-o-y in June, the lowest figure since 2007, signaling worries about the anticipated economic recovery
• The government is considering scaling down the Manta Refinery project, while oil exports fell 2.6% m-o-m in May due to lower shipments to the US and Peru

The economy expanded 2.2% q-o-q in 1Q17, according to the Central Bank of Ecuador (BCE in Spanish), and an accumulated figure of 2.6% y-o-y. The economic sectors with the highest growth rates were: Oil Refining, 28.4% – due to the repowering of the Esmeraldas refinery; Electricity and water supply, 22.4%; Fishing (except shrimp), 11.0%; Financial services activities, 5.7%; Trade, 5.7%; Domestic service, 5.6% and Transportation, 5.3%. In this regard, the BCE manager Veronica Artola stated the institution sees the economy in an expansion phase and that next month figures are encouraging.

• Economic Activity grew 5.8% y-o-y in April while several international agencies upgraded their growth prospects for Ecuador. We stick to our original estimation of 1% of GDP shrinkage as significant external and domestic risks persist, in our view
• S&P downgraded its long-term foreign and local currency sovereign credit ratings on the Republic of Ecuador to “B-“ from “B” with stable outlook, mainly due to the financing and liquidity limitations the central government is undergoing
• Imports increased 72% y-o-y in the first half of June, thus signaling the first shocks from the safeguards scheme lifting. We remain confident the overall effect for the economy will be positive in the medium term

According to the National Institute of Statistics and Census (INEC), the economy activity index expanded 5.8% y-o-y in April, below than the 8.6% y-o-y figure reached in March. Nonetheless, in seasonally adjusted terms, the economy activity registered a stark 6.9% y-o-y increase in April, higher than the 6.3% y-o-y registered the previous month. This result came hand in hand with latest revision by the World Bank (WB) which upgraded its forecast on the performance of the Ecuadorian economy in 2017 from -2.9% to -1.3% – in line with a year-end estimation- while reducing its Latin America growth outlook from 1.2% to 0.8%. Meanwhile, Bloomberg released the results from its latest survey of seven top economists which concluded Ecuador will likely expand 0.5% in 2017.

• Former president Rafael Correa warned about the challenges the Ecuadorian economy will face on its external sector
• Private Banks increased their ROE to 9% in May on account of a greater lending portfolio and liquidity
• Inflation continues to underperform in May and stood at 1.1% in y-o-y terms, within our year-end estimation

Former president of the Ecuador Rafael Correa warned about the new challenges the Ecuadorian economy will face regarding the external sector in the short term. In his view, the weak spot of the economy is not public spending, but the external sector due to the use of the US dollar as the legal currency. Correa referred explicitly to the return to a 12% Value-Added Tax (VAT) – which was raised to 14% last year – as a measure to finance reconstruction efforts, the end of the import tariffs, the greater liquidity levels and potential demand growth that could generate serious problems in the current account.

• Only a day after President Lenin Moreno affirmed they would look to refinance the external debt, Ecuador issued USD2bn in 6-year and 10-year bonds with lower coupon rates than recent similar issuances
• Tax collection in April was the highest in 27 months, but locals warned that the current positive trend is not supported yet by economic activity levels
• Two US companies will invest USD450mn in the Fruta Del Norte gold and silver mine. Meanwhile, the government is looking for financing for the Pacific refinery project

Ecuador launched on Tuesday a dual-tranche issuance consisting of two USD1bn bonds maturing in 6-yr and 10-yr, carrying corresponding 8.75% and 9.625% coupon rates. This takes place just a day after President Lenin Moreno affirmed they would be looking for a refinancing of the external debt which Moreno affirmed is “expensive”. We see the issuance with good eyes in order to achieve such objective, as they managed to achieve lower coupon rates than in the most recent issuances of bonds with similar maturities – September 2016’s 6-yr bond launched with a coupon of 10.75%, while January 2017’s 10-yr retap carried a 9.65% coupon. Both bonds were priced at par.

• The government decided to move forward with the dismantling of the Bilateral Trade Agreements (TBI), despite negative reactions by commercial partners as the European Union
• Ecuadorian exports are on the rise as non-oil exports in 2016 grew 3.4%, and exports to the European Union in the January-April period expanded 13.14% y-o-y on account of the Multiparty Trade Agreement
• Total tax collection jumped 12.3% y-o-y in April, thus providing strong signals over the recovery of domestic consumption

This week, President Rafael Correa signed an Executive Decree formalizing the denunciation of a total of 16 Bilateral Investment Treaties (TBI in Spanish). This action follows those of the National Assembly and the Supreme Court which denounced and declared such agreements as unconstitutional, respectively. The main reason behind the elimination of the TBIs is the set of benefits they granted to foreign capital and multinational companies in detriment of the nation, according to Coordinating Minister of Knowledge and Human Talent, Andres Arauz. Likewise, foreign companies have used the TBI to substantiate their positions in litigations which have resulted in rulings against the Ecuadorian state.