By Ramiro Crespo
Recently, we noted that the year-long slide of the dollar compared with the euro, the second biggest market for Ecuadorian exports, as well as the surprising resilience of oil prices provide some solace to the Ecuadorian economy. After some criticism we've happily received, we'd like to clarify that these dual effects help to mitigate risks in a situation under which the general macroeconomic climate has deteriorated. We certainly don't see a new boom around the corner.
Taking into account recent economic data, including the Economic Commission on Latin America and the Caribbean's (ECLAC) recent update to its regional growth prospects, the global outlook has weakened despite some hopeful signs from the U.S. and Germany. As one leading Ecuadorian banker instrumental in preparing this report said, "the question is whether we have a hard or soft landing." The most likely scenario, the former economy minister added, is one of stagnating progress of growth and hence slower reduction of inequality after 12 "golden years" of historically practically unparalleled Latin American growth.
Several factors contributed to the gloomier consensus mood, which has already seen growth rates slow significantly in the largest emergenging markets, or "BRICs" (Brazil, Russia, India, and China). According to ECLAC, fiscal consolidation is weighing on growth in most industrialized countries five years after the Great Recession. This has led to reduced demand for exports from major emerging economies, compounding problems in China and India.
On the bright side, growth in the U.S. has strengthened, while aside from booming Germany some signs of recovery have emerged in Europe, notably Greece's successful return to the debt market. While monetary policy from the EU nonetheless looks set to continue to keep interest rates near zero, in the case of the U.S., open-market policy is setting the stage for an incipient tightening. This has initially meant a gradual lifting of the U.S. Federal Reserve's foot of the accelerator, but enough to spark significant shifts in assets to industrialized markets from emerging ones. Many see this as a clear overreaction. Because of potential implications for inflation and monetary policy, independent central banks in emerging markets have watched these developments closely. Worries of a sharper slowdown in China, which hasn't yet happened, have pulled down commodity prices, with the notable exception of oil, even though here, too, fears of oversupply exist. ECLAC argues that this stems from fears of risks to energy supply, the latest of which has emerged amid the Ukraine crisis.
To interpret stronger growth in the U.S. and Germany as reasons to celebrate thus sadly looks overly simplistic, for several reasons. Firstly, rising demand in these countries has less of a pull on commodity prices because "growth is less intensive in demand for primary products" there, according to ECLAC. Second, higher financing costs will lead to falls in inventory. "Thus, in 2014, global liquidity is likely to tighten, bringing major macroeconomic policy and external financing challenges for the region," the UN-think tank adds. "This context of scant economic growth, widening current account deficits and more limited capital inflows poses new and greater challenges for 2014, specifically for monetary authorities."
Sadly, Ecuador is among those economies which have done comparatively less well in preparing for a downwards cycle, which even President Rafael Correa has recognized the country faces. Other countries have done much more to strengthen their monetary and fiscal and, by extension, political institutions. Debt levels have dropped sharply from the crisis-prone years before the new millennium, while central banks have moved to target inflation and won greater independence. In many aspects, Ecuador has retreated, not least by removing checks and balances on executive power. While in Ecuador, much as in the region overall, the middle class has grown substantially, it remains relatively precarious. This hasn't been helped by the inability of the economy to shift to a less resource-dependent structure. Failing to participate in the boom of foreign direct investment that poured into most of the rest of the region, Ecuador continues to rely mainly on exports of oil and agro-industrial products as well as emigrant remittances to supply it with dollars.
Nonetheless, ECLAC has a relatively positive view on Ecuador's growth outlook. It estimates 5% GDP growth for Ecuador this year, behind only Panama, Bolivia, and Peru. This implies an acceleration of growth from last year's 4.5%, the third fastest in South America, which grew an average 3% in 2013. Domestic analysts are less optimistic, however, noting supply problems caused in the first quarter through tough new import restrictions. Even though these have been loosened, they estimate it falls short, as may well happen, liquidity will suffer, constraining the growth of Ecuador's economy. slower growth during the first months' turbulence. Additionally, growth will be influenced on whether the government obtains its huge credit requirement of around $9 billion, close to 10% of gross domestic product. If it falls short, as may well happen, liquidity will suffer, constraining the growth of Ecuador's economy.
Ramiro Crespo is an economist and Chairman of the Editorial Board at Analytica Investments.
Credit: Ecuador Weekly Forecast, Analytica Investments