Ecuador Enters Recession as China Loans Fail to Offset Oil

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  • Ecuador's economy contracted 0.3% in the second quarter
  • Economy enters recession for the first time since 2009

Ecuador’s economy slipped into a recession in the second quarter for the first time since 2009 as the government struggles to borrow enough money to offset the global oil slump.

Gross domestic product shrank 0.3 percent from the previous three months, after contracting a revised 0.1 percent in the first quarter, central bank General Manager Diego Martinez said Wednesday to reporters in Quito. From the year earlier, the economy expanded 1 percent.

Ecuador is running out of money. Its use of the U.S. dollar as its official currency means increased dependence on foreign loans as the slump in oil prices cuts the value of exports. The local money supply has shrunk by about a quarter this year, while the trade deficit has swelled to a record. To make matters worse, expected loans from China, the nation’s biggest foreign creditor, haven’t come through as fast as forecast, forcing the government further afield in search of cash while it cuts spending.

“Ecuador’s economy is sustainable insofar as the net dollar inflows are positive,” Martinez said. “Even though there have been unforeseen difficulties accessing financing, the government has been very responsible by reducing its investment expenses.”

The Latin American nation’s trade deficit in the year through July swelled to $1.41 billion as falling exports from oil and coffee to fresh cut flowers and tuna reduced the amount of dollars entering the country. That’s the biggest gap for that period in central bank data going back to 1996. President Rafael Correa has tried to limit capital flight by increasing import taxes and Tuesday sent a bill to congress to help boost foreign investment. Still, that’s not been enough to avoid cutting budgeted outlays by $2.22 billion, or about 6 percent, so far this year.

Martinez revised the bank’s forecast for growth this year to 0.4 percent from the 1.9 percent forecast in June. The new figure is based on an estimated price for its oil exports of about $45 a barrel, he said. The nation’s Oriente and Napo crude exports have averaged $47.31 a barrel in the first seven months of the year, according to the most recent data from the central bank.

Faced with less-than-expected loan disbursements from China this year, the government has been forced to tap bond markets twice and agreed to sell almost a year’s worth of crude exports to Thailand in return for $2.5 billion of financing through 2020. In a June 17 statement, Ecuador’s Finance Ministry said it received $900 million in April and May from China. Finance Minister Fausto Herrera in January said Ecuador expected a total of $4.2 billion in loan disbursements from the Asian country this year.

Ecuador needs about $8 billion for this year’s financing needs, Martinez said. The nation has received a total of $3.56 billion in foreign loan disbursements as of Aug. 31, according to Finance Ministry data.

The Latin American country, which defaulted on most of its foreign debt in 2008 and 2009, is now trying to improve its international reputation in global credit markets and plans to repay bondholders when $650 million of its notes come due in December, Martinez said. The nation has no plans to end dollarization, he said.