2024-07-08 09:39:53
The slowdown of the Ecuadorian economy in 2024, due to factors such as power outages and insecurity, leads to greater informality.
The Ecuadorian economy will stagnate in 2024, according to forecasts from organizations such as the Central Bank of Ecuador (BCE) and the World Bank. Even according to the International Monetary Fund (IMF), the performance of Ecuador’s economy will be well below the Latin American average.
The multilateral organization expects South America to show an improvement of 1.4% in 2024. In contrast, Ecuador’s Gross Domestic Product (GDP) performance will be 0.1%, according to the multilateral. The deterioration in the economy’s performance is due to a series of external and internal shocks that the country is facing this year, says Gonzalo Rueda, general manager of the market consultancy MarketWatch.
«The economy is growing less and there is more informality. Gonzalo Rueda, MarketWatch
The deterioration of the country’s economy means less employment and with it the increase in informality, which represents precarious employment and less income for the public coffers, due to tax evasion.
Higher interest rates and expensive financing
One of the external impacts facing the Ecuadorian economy is that, in recent years, world powers have continued to raise their interest rates.
This is to control inflation, which has been triggered by the implementation of expansionary fiscal and monetary policies, such as cash transfers to the population, which were established at the beginning of the Covid-19 pandemic. For example, interest rates in the United States remain between 5.52% and 5.50%. In contrast, in the European Union they are at 4.25%, after a slight reduction after two years of increases.
Rising interest rates are driving up the cost of loans from banks in the United States, restricting consumption.
It also increases the yield that investors pay.
For Ecuador, and the rest of Latin America, this means a flight of capital, which forces governments and companies to pay higher interest rates to access external financing. And the rise in the cost of money and inflation means that migrants in the United States, including Ecuadorians, save little and, therefore, send fewer remittances. Political uncertainty The economy is also slowing down due to the
political uncertainty
which has been dragging on since 2023, with the impeachment of President Guillermo Lasso, the death crossed with which the Assembly was dissolved and early elections were called. And the uncertainty persists in 2024 because Daniel Noboa, who won the electoral process and will be president for a year and a half, has faced setbacks with the Assembly, not having a majority.
This complicates the approval of new reforms, especially economic ones. Greater uncertainty increases the country’s risk, which has made Ecuador no longer an attractive country for foreign investment, explains Rueda.
It also leads to high interest rates. Country risk is the indicator that reflects the probability that a State will not pay its external debt, which is known in international markets as “default”. Ecuador registered a country risk of 1,363 points on June 20, 2024, the highest figure since March 29, when it reached its lowest point in recent months, reaching 1,111 points.
Increase in insecurity
The escalation of violence in Ecuador in recent years is also taking its toll on its economy. Low investment, falling sales, less tourism, business closures and higher costs are some of the consequences of extortion and states of emergency, with curfews. According to the Global Peace Index, the annual economic cost of violence in Ecuador represents 6% of its GDP, which was more than USD 12 billion, according to the latest report.
This volume of money considers direct and indirect costs, such as public forces (police and military); and decreased productivity of victims of violent events, the study details. Added to this are the losses of the productive sector, which faces extortion, kidnappings for ransom, robberies and attacks. The shrimp sector alone reports that insecurity costs it USD 100 million in protection.
And violence erodes the purchasing power of the poorest population, due to the robberies and extortions faced by shops, markets and trucks that deliver products in their neighborhoods. “There are areas of the country where the distribution of products is absolutely controlled by organized crime,” the Chamber of Industries and Production (CIP) has recognized. Most of these areas are the poorest, where merchants pass on the cost of extortion and robbery to the sale price to the consumer, explains the market consultancy Kantar.
Power cuts
Another problem facing the Ecuadorian economy is the electricity crisis, which has led to power outages and even a national blackout, between October 2023 and June 2024. The power outages are explained by two factors.
The first is the severe drought, due to climate change and the El Niño phenomenon. In April, the water level in the giant Mazar hydroelectric dam in Azuay fell to historic lows.
The Mazar reservoir is key for the country, as it is a water reservoir designed to supply a complex of hydroelectric plants that are located in the form of a cascade: first is Mazar, further down is Paute-Molino and finally, Sopladora.
The three hydroelectric plants have a capacity of 1,756 megawatts, which represents almost 38% of the national demand, above Coca Codo Siclair, which has 1,500 megawatts of power.
The second factor, with a greater impact on the problem, is that the operation of the National Interconnected System “is degraded” and “without resources that allow the system to operate, complying with the criteria of quality, reliability and security,” explains the national operator Cenace.
This leads to the system operating close to the limits of instability; therefore, “it is permanently exposed to load disconnections.” The economic losses of the productive sector of Ecuador, due to the blackouts, would amount to USD 12 million per hour, that is, USD 72 million per day.
This was confirmed by the Minister of Energy, Roberto Luque. This is due to the fact that there are businesses that cannot operate, invoice or must incur additional costs, such as the acquisition of diesel generators. The power cuts even led the administration of Daniel Noboa to suspend the work day throughout the country on April 18 and 19.
Increase in VAT and lower consumption
In addition, this year the Ecuadorian economy has faced the rise of the Value Added Tax (VAT), from 12% to 15%, starting April 1. The measure came into effect after the approval of the tax reform promoted by President Daniel Noboa, to finance the “Responsible economic actions to confront the internal armed conflict,” the Government argued.
With a 15% VAT, the Government expects additional revenues of USD 1.3 billion per year. In 2024 alone, it could collect around USD 1 billion. But, on the other side of the coin, the increase in the tax results in a reduction in household consumption, which is already expected to be low this year, according to information from the Central Bank. One of the most affected sectors would be the commercial sector, which already had a bad 2023, due to the security crisis, political uncertainty and power cuts.
57% of the 359 products that make up the basket of goods and services consumed by a typical household experienced the increase in VAT. In this context, there are companies that have assumed the tax to encourage sales, although they can do so by leveraging changes that favor them, such as the trade agreement with China, which means tariff reduction, Rueda explains.
Regressive erosion of the Coca River
The electricity sector is also threatened by the regressive erosion of the Coca River, which was reactivated in June 2024 and is increasingly closer to the Coca Codo Sinclair intake works, the largest hydroelectric plant in Ecuador.
Erosion is a strange natural phenomenon that began in February 2020, with the collapse of the San Rafael waterfall, located on the Coca River, between the Amazonian provinces of Napo and Sucumbíos. Since then, it has threatened the hydroelectric plant and caused severe damage to the oil infrastructure, such as:
Heavy Crude Oil Pipeline (OCP) Trans-Ecuadorean Oil Pipeline System (SOTE)
Shushufindi – Quito pipeline, which transports around 9,600 barrels of liquefied petroleum gas (LPG) per day and base gasoline.
In June 2024, the accelerated advance of erosion due to heavy rains caused nearly 140 meters of OCP to be practically uncovered and in the air. The threat led to the suspension of the operation of the pipeline, which transports 40% of Ecuadorian oil, especially oil from the ITT oil field, which produces heavy crude oil and is managed by the state-owned Petroecuador.
For this reason, Petroecuador shut down 55 wells in this oil area. In this context, oil production has collapsed. This situation forced the state-owned Petroecuador to declare “force majeure” in crude oil exports. The oil sector is one of the most important in Ecuador, considering that crude oil is its main export product. Its exports amounted to USD 8,952 million in 2023, according to the Central Bank.
By: PRIMCIAS