Ecuador

Security and fiscal challenges weigh on growth

Ecuador's economic growth is expected to slow in 2024, largely due to deteriorating security conditions, which will affect private consumption (around 62% of GDP) and gross fixed investment (21%). The projected slowdown in consumption is linked to rising drug-related gang violence, exacerbating existing public concerns about homicide rates. The events of January 2024 in Guayaquil, which saw the leader of the country's main criminal group escape from prison, triggering a series of terrorist attacks and culminating in the government’s state of emergency decree, have further undermined consumer confidence and added to economic challenges. Moreover, rising fiscal pressures led the Noboa government to approve a temporary VAT increase from 12% to 15% to fund the fight against organised crime, and these pressures will probably prompt government spending cuts (15% of GDP), except for security measures, such as cuts in fuel subsidies from Q2 (estimated at 2.6% of GDP in 2022). All of these are likely to further damp private demand. Last, Ecuador's oil production is likely to be significantly affected by the ban on oil drilling in the Yasuní National Park, approved by a referendum in 2023, as the closure of the Ishpingo-Tambococha-Tiputini (ITT) oilfield, Ecuador's fourth-largest, accounts for 15% of Ecuador's oil production. This cut in oil production is likely to have a negative impact on the labour market in the short term, which will translate into lower employment and lost wages.

Fiscal deficit should remain high to support security spending

The current account is expected to switch to a deficit in 2024, mainly on back of a contraction in net exports, with the pace of decline in exports due to lower oil production following the closure of the ITT oilfield and falling global commodity prices outpacing that of imports. Meanwhile, the secondary income surplus (4.1% of GDP in 2022) is expected to decline as expatriated workers' remittances from the US, Spain and Italy weaken somewhat in light of the expected deterioration in job markets. Conversely, the services deficit (-2.3% of GDP) is expected to widen as inbound tourism should be affected by the crime wave. Last, the primary income deficit (-1.6% of GDP) should remain relatively stable. On the financing side, FDI will remain low due to economic, legal, and political uncertainty. Moreover, foreign exchange reserves ensured only 2.5 months of import cover in March 2024, but should increase during the year in view of the fresh agreement signed with the IMF in April 2024.

Regarding the fiscal accounts, the budget balance deficit should widen in 2024 as more sluggish activity leads to revenue losses and the general elections planned for 2025 discourage austerity measures. In addition, the ban on drilling in the ITT oil field will aggravate this outlook as the government expects losses of USD 13.8 billion in revenue over the next 20 years. Finally, the spending side will not bring relief in the short-term with pressures arising from increasing salary expenses, higher debt servicing costs and increasing spending to tackle the ongoing crime wave. That said, the agreement signed in April 2024 to underpin a USD 4 billion four-year Extended Fund Facility with the IMF should provide some fiscal sustainability in the coming years. Multilateral lending (including the World Bank, CAF, Inter-American Development Bank, in addition to the IMF) will remain the main source of financing. Gross public debt, 74% of which is external (48% owed to multilaterals and 38% to markets), is expected to stay on an upward trend as the county struggles with weak growth and the primary budget deficit remains wide.

Political and diplomatic instability on the rise

President Daniel Noboa's administration faces a troubled political environment in 2024. Noboa, of the National Democratic Action Alliance (ADN) party, was sworn in after winning a tumultuous election in October 2023. The process took place after the former president Guillermo Lasso invoked the “mutual death” – a constitutional mechanism that dissolves the National Assembly and triggers new elections for both the executive and legislative branches – as he faced impeachment proceedings. The campaign period was marked by an anti-Correism sentiment that was boosted after the murder of Fernando Villavivencio, a presidential candidate who persistently was a critic of the administration of Correa and was assassinated in Quito following a campaign rally. While Daniel Noboa is committed to conventional macroeconomic policies, he faces hurdles to implement deep structural reforms during such a short term of office (general elections are scheduled for May 2025) as the National Assembly remains highly divided. His National Democratic Party holds only 14 out of 137 seats in the National Assembly, while the opposition, Citizen Revolution Movement, still has the highest number of seats (51). Given this political landscape, he is having difficulty in creating coalitions with other parties to push his agenda through the National Assembly.

The difficult security situation, exacerbated by rising drug gang warfare since Ecuador became an export hub for cocaine produced in Peru and Colombia and trafficked through Guayaquil, prompted Noboa to declare a state of emergency. In April 2024, the referendum aimed at giving the security forces (military and police combined) more authority to apprehend and prosecute criminals produced a mixed result. Overwhelming public approval for the security- and crime-related questions (9 out of 11) confirms the strong support for President Noboa's security policies. However, high disapproval regarding the labour and international arbitrage questions may signal obstacles ahead in passing economic reforms and difficulties in articulating and communicating them. Furthermore, the administration is facing challenges in securing legislative support for fiscal measures aimed at combating organised crime. Recent approval for a temporary increase in the VAT rate from 12% to 15% to fund the fight against organised crime, does not appear to be enough to fund anti-drug efforts and reduce the deficit at the same time. That said, with lack of public support and elections looming, there is little incentive for the National Assembly to support further austerity measures.

Regarding foreign policy, in April 2024, a group of Ecuadorian police officers stormed the Mexican embassy in Quito to arrest Jorge Glas, who served as Ecuador's Vice President between 2013 and 2018. An ally of former President Rafael Correa, he was convicted of corruption and had been a refugee in the Mexican embassy since December. Several Latin American countries, as well as the United States and Canada, consequently condemned this action, signalling the country's diplomatic isolation in the region. Following the exfiltration operation, Mexican President Andrés Manuel López Obrador ordered that diplomatic ties be severed and asked the International Court of Justice to suspend Ecuador as a member of the United Nations. Last, the country is pursuing its trade liberalisation efforts by negotiating free trade agreements with other trade partners.

Payment

Cheques are still a frequently used means of payment for commercial transactions in Ecuador. Nevertheless, the use of cheques is declining, due to a growing preference for electronic payments for transactions of all values.

Credit transfers are used for both high-value and low-value payment transactions. High-value and urgent inter-bank transfers are usually cleared via the Banco Central Ecuatoriano (BCE). Inter-bank transfers can include capital, money and foreign exchange market transactions, as well as public sector and commercial payments. Transfer instructions can be submitted via paper-based instructions or through online systems such as?SWIFT.

Cash is frequently used, particularly for low-value transactions.

Debt Collection

Amicable phase

Amicable negotiations are a crucial step in successful debt collection management. These negotiations are highly detailed and cover aspects including the number of instalments, write-offs, guarantees, collateral, grace periods and interest.

Legal proceedings

Ecuador’s judicial system comprises courts, administrative bodies, autonomous bodies and subsidiary bodies. The jurisdictional bodies responsible for administering justice are the National Court, regional courts, law courts, law tribunals and Justice of the Peace courts.

The Judicial Council is the governing body responsible for the administration, supervision and discipline of the judicial function. The judicial system also encompasses subsidiary bodies, such as notaries, auction services, foreclosure services, legal custodians and other bodies, as determined by law.

The Código Orgánico General de Procesos (COGEP), a new legal code in force since May 2017, should help to speed up procedures.

Under the new legal code, trials can be in the form of Executive Judgments or Ordinary Judgments.

Executive Proceedings

Executive proceedings are initiated by filing a written complaint with the Court. Supporting documents (such as the pagaré or letra de cambio) should be attached to the claim. Cases are assigned to a judge who then has 45 working days to decide whether the claim is complete. The judge then hands down precautionary measures within the following 90 days. The judge orders a single audience 120 days later, during which he delivers a sentence.

Ordinary Proceedings

Ordinary proceedings are initiated by filing a written complaint with the Court. The case is then assigned to a judge who has 60 working days to decide whether the claim is complete. The judge then issues a writ ordering the serving of the written complaint to the debtor. The debtor has 90 days to respond with a written defence. The judge then orders a single audience during which he will deliver a sentence.

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Enforcement of a Legal Decision

A domestic judgment becomes final and enforceable after any appeals have been exhausted. The judge of the court of first instance is responsible for enforcing judgments and issues a writ of execution ordering the relevant party to comply with the judgment within five working days. If the order is not complied with within the five-day period, the judge orders the seizure of the debtor’s assets in order for them to be auctioned off.

The Ecuadorian Civil Procedure Code sets out the requirements for the enforcement of foreign judgments, in accordance with the appropriate treaties, international conventions and Ecuadorian law. The approval procedure begins with a phase of knowledge gathering (for ordinary trials) that is performed in the defendant’s domicile court before admitting the execution. Ecuador has signed and ratified a number of international treaties for the recognition and enforcement of foreign judgments, including the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards.

Insolvency Proceedings

There are two phases in Ecuador’s insolvency proceedings:

CONCILIATORY PHASE

The objective of this phase is to ensure that the debtor company can continue to operate, by putting into place signed agreements with all of its recognised creditors.

BANKRUPTCY

Bankruptcy proceedings entail the sale of the debtor company and its assets, with profits from the said sales being used to pay its debts to creditors.

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Last updated: April 2024