Bloomberg News

Ecuador Economic Growth Stagnates as Oil Drop Cuts Spending

January 09, 2013

Ecuador’s economy, South America’s seventh biggest, is growing at its weakest pace since 2010 as lower oil prices and limited financing options after a 2008 default crimped government spending and cooled domestic demand.

Gross domestic product expanded 4.7 percent in the third quarter from the previous year and 1.5 percent from the prior quarter, the central bank said today in a report on its website. The bank revised down figures for second-quarter growth to 4.6 percent from a previously reported 5.2 percent, the lowest yearly reading since the third quarter of 2010.

Ecuador’s government, which depends on oil sales for about 44 percent of its revenue, used public spending to boost growth in 2012, Economic Policy Minister Jeannette Sanchez said yesterday. As oil prices fell last year, revenues declined, which limits the amount the government can spend to stimulate the economy, said Capital Markets economist Michael Henderson.

“Under Correa you’ve basically seen government spending driving growth,” Henderson, who forecasts 4 percent annual growth in 2012 and 2.5 percent in 2013, said Jan. 2 in a telephone interview from London. “You’re going to see domestic demand slow further and pretty much we expect that to translate into a halving of growth rates from 2012 to 2013.”

Prices for WTI crude sold in New York, Ecuador’s benchmark, slid 5.8 to $91.82 in 2012, data compiled by Bloomberg show. Ecuador, a member of the Organization of Petroleum Exporting Countries, may see oil prices decline further to about $85 a barrel in 2013, Henderson said.

Spending, Growth

Ecuador, which uses the U.S. dollar as its official currency, has had limited access to foreign credit since defaulting on $3.2 billion of international bonds in 2008 and 2009.

Since then, the country has relied on oil sales, tax increases and loans from China to help finance the budget.

President Rafael Correa, a self-described socialist revolutionary running for re-election Feb. 17, said last month the government needs about $6 billion, or 7.75 percent of forecast GDP, to finance public spending this year.

Ecuador reached a deal with China for an additional $2 billion loan to cover the budget gap, the Finance Ministry said in December.

The central bank in July lowered its forecast for economic growth this year to 4.8 percent from an earlier estimate of 5.35 percent.

In 2013, the economy is expected to expand 4 percent, less than the bank’s earlier forecast of 4.37 percent growth, the bank said.

The yield on Ecuador’s 9.375 percent bonds maturing in 2015 fell 2 basis points, or 0.02 percentage point, to 8.43 percent as of 3:11 p.m. Quito time, according to data compiled by Bloomberg. The bond’s price rose 0.4 cents to $102.40 cents on the dollar.

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net


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