Bloomberg: Ecuador Economy Expanded At Slowest Pace In Eight Quarters

July 2, 2012 7:23 amComments OffViews:

Ecuador’s economy expanded at its slowest pace in eight quarters in the first three months of the year, as construction and agriculture output slumped.

Gross domestic product rose 0.7 percent in the first quarter from the three months ended in December, the weakest performance since the first quarter of 2010, and grew 4.84 percent from the year-earlier period, the central bank said today in a report on its website.

Ecuador, which depends on oil exports for about 41 percent of government revenue, saw prices for its Oriente crude jump 16 percent in the first quarter, peaking at $120.68 per barrel on Feb. 24, according to data compiled by Bloomberg. Since then, prices for the nation’s crude have plunged 27 percent, a sign that weaker growth in South America’s seventh-biggest economy is “almost inevitable,” said Michael Henderson, an analyst at Capital Economics Ltd. in London.

“Oil prices tend to drive economic growth,” Henderson said June 28 in a telephone interview. “This year they’ll struggle to do better than about 4 percent.”

Ecuador’s Finance Ministry forecasts GDP will rise 5.35 percent in 2012, while the World Banksaid June 12 it expects an expansion of 3 percent, less than its 3.5 percent estimate for the Latin American and the Caribbean region overall.

Chinese Loans

Loans from China, totaling about $7.3 billion since 2009, have helped President Rafael Correalessen the impact from a global economic slowdown this year, Henderson said. The government, which defaulted on $3.2 billion of global bonds in 2008 and 2009, expects to receive an additional $1.7 billion from China this year to finance government spending, Correa said in February.

The liquidity boost from crude prices and Chinese loans was cited by Standard & Poor’s when it raised Ecuador’s credit rating last month to B from B-, five levels below investment grade.

Still, with crude prices down 0.6 percent since S&P’s June 7 upgrade, the government has begun to take measures to protect the economy from a balance-of-payments crisis should crude keep declining, Quito-based research firm Politik said June 28 in a note to clients.

The government said June 18 it’s seeking to cut imports by $300 million this year by limiting purchases of consumer products, including vehicles and mobile phones. Planned repairs to the nation’s biggest refinery, which will force the country to increase spending on fuel imports, have also been delayed, according to the state-owned oil company, PetroEcuador.

‘Achilles Heel’

“The government appears to recognize, at least implicitly, a scenario that could get more complicated in the medium term,” Politik said.

Ecuador, which uses the U.S. dollar as its official currency, had a $712 million balance-of-payments deficit in the fourth quarter of 2011, the most recent data from the central bank shows. Correa, who openly criticizes the country’s use of the greenback, has said trade deficits are the nation’s “Achilles’ heel.”

The yield on Ecuador’s benchmark dollar bonds due in 2015 jumped 23 basis points, or 0.23 percentage point, to 9.53 percent on June 29, according to JPMorgan Chase & Co. A 29 basis-point drop in yields during the first quarter was erased in the three months ended last week, as the nation’s borrowing costs jumped 54 basis points, according to JPMorgan.

“It’s really been only in the last few months where oil prices have really slowed,” said Henderson. “It might be a few more months before we really see what the underlying state of affairs is for Ecuador.”

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