One of Latin America’s biggest oil producers is enjoying a period pf sustained growth
In the past few years, Ecuador has experienced a dramatic economic recovery that has made the nation’s economy become the seventh largest on the continent. Whilst the policies of the country’s government have directly contributed to Ecuador’s economic turnaround, the biggest factor in the recent gains has been the nation’s large oil reserves. Despite growth, some market analysts fear that Ecuador’s economic pattern may be unsustainable in the long term.
Ecuador’s economy is almost entirely dependent on the country’s oil supply. Petroleum production is the largest industry in the nation, followed distantly by exports of various fruits, and automobile manufacturing. Over half of the national export earnings are derived from the export of oil and petroleum products for agriculture, domestic use, and commerce. These exports also account for nearly 20 percent of GDP, and nearly 40 percent of government revenue.
In 2000, the country decided to adopt the US dollar as its main form of currency, which served to help stabilise an economy that had been quite volatile in previous years. The election of President Rafael Correa – a leftist politician who believes strongly in the use of government spending to stimulate the economy – in 2007 was another factor in the country’s economic boom. Upon election, Correa reworked several of Ecuador’s oil contracts to give the government greater control of the profits from the petroleum sector. When oil prices suddenly increased in 2008, shortly after Correa’s election, Ecuador was in a prime position to benefit from the windfall.
Effects of recovery
As Ecuador’s market has rebounded, other economic factors have improved as well. In 2011, the country’s poverty index fell four percentage points, and the country posted an economic growth of eight percent that same year, outpacing government estimates of 6.5 percent growth. Government stimulus spending has also increased the country’s minimum wage, leading to a rise in inflation and the consumer price index. The national unemployment rate dropped a full percentage point in 2011, falling to 5.1 percent.
Forecasting Ecuador’s economy for 2012
In the short term, President Correa’s economic policies have appeared to work, but there is some concern that the increases will not continue for long. The government’s spending has been largely financed by international loans, mostly from China. In fact, Ecuador sends nearly half of its oil exports to China as a form of payment on previous loans. According to Pedro Delgado, President of Ecuador’s Central Bank, a large portion of the country’s 2012 budget deficit is directly covered by Chinese financing. “At least $1bn is covered with financing that was obtained from China at the end of the year,” Delgado stated. Delgado added that the country was also looking to effect another bond sale but that market conditions would dictate the timing. He added: “Everything depends on the market environment.”
Recent declines in oil prices have put Ecuador’s burgeoning economy in an uncertain position. In response, the government has revised its economic forecast to reflect a modest 4.2 percent growth for 2012.