Ecuador: Economy grows at weakest pace in two years in Q4 2018
Ecuador’s economy lost traction in the final quarter of last year, with annual GDP growth falling to 0.8% from the previous quarter’s revised 1.5% (previously reported: +1.4% year-on-year), marking the weakest expansion in two years. Growth also declined in quarter-on-quarter terms, dropping to 0.1% in Q4 2018, from a revised 0.8% in the third quarter (previously reported: +0.9% quarter-on-quarter). Overall, the economy slowed markedly in 2018, with full-year growth tumbling to 1.4% (2017: +2.4%).
A continued slowdown in domestic demand, which grew at just over half the pace of the previous quarter (Q4: +1.3% yoy; Q3: +2.2 yoy), led the quarterly deceleration. Particularly, fixed investment growth plunged, which came in flat in the quarter (Q3: +1.6% yoy), reflecting lower investment growth in the construction and services sectors. Lower business confidence likely deterred investments, as concerns persisted over the dollarized economy’s ability to secure external funding to alleviate its liquidity shortfalls. Private consumption growth also slid, amid moderating credit availability, recording the worst print in two years (Q4: +2.1% yoy; Q3: +2.7% yoy). On the flip side, government spending accelerated in the quarter (Q4: +4.0%; Q3: +2.3%), highlighting the challenges to addressing the entrenched fiscal imbalances.
Meanwhile, the external sector dragged on growth once again, although less severely than in the third quarter. Exports lost pace, growing 0.6% in Q4, following the third quarter’s 1.1% expansion, with cooling global growth and trade tensions weighing on export performance. Import growth also weakened but continued to outpace exports (Q4: +2.5% yoy: Q3: +3.8% yoy).
Looking ahead, the economy is set to decelerate this year, as spending cuts and tighter credit conditions curtail domestic demand and translate into weaker growth in overall economic activity. Ecuador finally secured a USD 4.2 billion extended fund facility with the IMF at the end of February, which will support the economy over the next three years. Under the agreement, the government will cut public sector spending, while raising revenues through a tax reform that is scheduled to be presented to the National Assembly in the fourth quarter, in a bid to boost the country’s fiscal position. While the austerity measures will impede growth in the near-term, the fiscal adjustment should help to restore international reserves, improve competitiveness and strengthen the current account balance over the longer term.
Commenting on Ecuador’s IMF program, economists at JP Morgan stated:
“All told, the program makes a somewhat optimistic assumption that the fiscal anchor and structural reforms will curtail private sector outflows, enabling the fiscal effort to drive the change in reserves. Implicitly, the program seeks to improve the savings rate by forcing public sector savings while opening space in the medium term to “crowd-in” the private sector. Still, the magnitude of these adjustments over three years seem ambitious, especially in a dollarized economy with limited recourse to rely on monetary or exchange rate policy to smooth out the adjustment and correct deeply entrenched fiscal imbalances. The IMF has designed the program for the public sector to do the heavy lifting for this reason. The uncertainty is whether the private sector will now step up to invest and spur growth as the public sector withdraws.”