ECUADOR PEST Analysis

Summary Ecuador is a small country with about 15.8 million people found along the Pacific Coast of South America. The country is located between Colombia and Peru (see Exhibit 1).[1] Ecuador has a relatively long experience with democracy, but it has been marked by frequent cycles of instability. This all ended with the election of President Correa, a left-learning U.S. trained economist, in late 2006. President Correa succeeded in gathering the country to support a referendum and the Constitution was then rewritten. This referendum increased the power of the president and allowed the president to run for two consecutive terms. President Correa was then reelected in April 2009. His new term began in 2013. He is also currently attempting to change the constitution one more time to remove the limit on presidential terms so that he can run for president indefinitely.[2] Ecuador’s economy is mainly dependent on exports including petroleum, bananas, and other agricultural products. More than half of export earnings are derived from its oil resources; this providing approximately two-fifths of the government revenues. [3] Despite the significant changes in Ecuador’s standards of living, and the increase in the income of the poorest of 40% of the population in 8.8%, compared with the 5.8% of the country, there is still a lot to be done to tolerate and enlarge what has been accomplished in regards to the poverty reduction and inequality, as well as of the economic growth.[4]
Political Environment President Correa began his new four-year term on May 20, 2013. Human rights groups and media organizations such as the Committee to Protect Journalists have expressed dismay at the passage of a communications law he proposed to Ecuador’s National Assembly within a month of beginning his new term. The measure easily passed on June 14, 2013 and it was approved by the President a week later. The law addresses government concerns that the media is mainly in private hands and lacks professional standards, and that much of the opposition media is strongly opposed to Correa.[5] Also in June 2013, the National Assembly passed a new mining law by a large margin. The law attempts to regulate mining and eases terms for small and medium size mining projects by delaying the windfall tax until miners have recovered their initial investment and clarifies guidelines and regulations for mining operations. On the other hand, many of the large mining companies remain with a great deal of concern to the tax burden placed by the government on their profits.[6]
|Table 1: Analysis of Ecuador's Political Environment |
|Current Strengths |Current Weaknesses |
|Returning to the international capital markets with the |Bad payment morale. |
|issuance of a new 10 year bond. | |
| |High dependence on the oil sector. |
|New hydroelectric projects to be completed. | |
|Future Prospects |Future Risks |
|Low Oil prices. |Hurt government income; voluntarily defaulting on the debt. |
|Instability and track of inconsistency in the government |Anti-government and civil protests. |
|affairs | |

Ecuador is rich in resources, not only below ground such as in the oil and gas sector, but also above ground; hydroelectric projects are on the table and expected to be completed in 2016. This will not only reduce the country’s fuel imports but will also ease the pressure on the debt as a result of a new issuance of a 10 year bond of 2 billion US dollars. With the oil prices decreasing drastically, this alarms the stability of the economy and it obviously increases the chances of hurting the government’s income resulting into another voluntary default on debt (see Exhibit 2 and 3). Lower government income will also affect the economic growth and could trigger conflict among the people.[7][8]
Economic Environment Significant public sector investment, which accounted for around 16% of GDP in 2013, has supported solid economic growth in recent years. But, it also led to a steep increase in the budget deficit, which made a jump from around 1% of GDP in 2010-2012 to around 5% of GDP in 2013 and 2014. Consequently, as the Figure 2 and Figure 3 shows, public debt is expected to double between 2010 and 2015 to around 34% of GDP. Public debt levels remain low, but this is mainly the result of a government debt in the amount of 3.2 billion US dollars in 2008 and restructured in 2009, which reduced public debt from 21% of GDP in 2008 to 15% of GDP in 2009.[9] The results of the oil prices dropping so much, along with the terrible reputation of a government’s lack of keeping a promise and continuously defaulting on the account balances, could only generate a bad economy and unhappiness of its people (see Exhibit 7 and 8). Despite the instability in the political system, President Correa and the government in general, have increased its efforts in strengthen and diversify its political and economic ties with countries in Latin American, Europe and Asia. Ecuador is part of the Bolivarian Alliance for the Americas (ALBA), led by socialist Venezuela, and has strengthened its relations with Iran and China.[10] China has become Ecuador’s largest foreign lender since Quito defaulted in 2008, allowing the government to maintain a high rate of social spending, one of President Correa’s tops priority; Ecuador contracted with the Chinese government for more than $9.9 billion in forward oil sales, project financing, and budget support loans as of December 2013. All of these issues summarize to an unstable regulatory environment and the weak rule of law. Despite the many attempts the United States to assist and continue providing help to Ecuador, Correa government has taken opportunities to defy the US in some times provocative ways by expelling various U.S. State Department representatives.
Socio-Cultural Environment Ecuador is a country with a great deal of social and cultural diversity with inequality that prevails to dominate social problems. Although the literacy rate is currently rather high, there are no schools in the rural areas of the country. School is only mandated until the age of 14 and the conditions are scarce (see Exhibit 6). Although Correa’s support in the election can be credited to various factors, including increase in social spending and access to health care, the health issues in these areas are critical; and many children starve (see Exhibit 5). Ironically, Correa’s most impressive social achievement has been in these areas where he has funded for poverty reduction, and increased literacy rate, and improvements in infrastructure. Many are to believe that other challenges are still pending, better business climate, vitalize the labor market, formulate a clear trade policy, and control public spending, as clearly stated by Bernardo Acosta, Vice-President of the Chamber of Industries and Production. Malnutrition is very common among the population in the rural area. Many of these rural poor are members of indigenous groups which are now demanding recognition of their rights and respect for their lifestyles, values and beliefs. Moreover, the country is prompt to be continually affected by natural disasters such as floods, earthquakes, and volcanic eruptions. Ecuador hosts the most active volcano in the world, the Cotopaxi in the Andes, resulting this for the frequency of earthquakes.
Technological Environment The technological environment has had enormous difficulty to emerge with the debt ratio and their main concern which is the deficit of energy. The country has foregone under a great deal of changes and economic progress since Correa took presidency in 2007. In a nation that desperately needed unemployment and poverty reduction, had a critical shortage of safe roads and severe needs in health and education, Correa’s budgetary priorities have been superb and the programs are producing advances in the country. Annual growth in gross domestic product has averaged 4%; unemployment is below 5%; wages are up; inflation is a tame 3.1 (this thanks to the dollarization of the economy prior to his presidency.) The infrastructure improvements are evident; a new airport was built and roads have been improved all over the country leading to the capital; 95 new bridges have been built; new hospitals; and education is now accessible to everyone. S&P recently raised its long-term debt rating on the country, saying “the government has shown greater signs of pragmatism with efforts to attract foreign direct investment in the oil and mining sectors, re-engage multilateral institutions…and boost public investment to try to stimulate economic growth.”[11]

REFERENCES
U.S. Department of State, Background Note: Ecuador, June 8, 2011.
Central Intelligence Agency, Library: The World Fact Book, February 15, 2015.
The World Bank, Ecuador Overview, April 10, 2014.
Brian Ellsworth and Alexandra Valencia, “Ecuador Backing for Snowden Spurs Criticism of Correa Media Law,” Reuters, June 27, 2013.
Human Rights Watch, “Ecuador: End Assault on Free Speech,” Press Release, June 17, 2013 Chris Kraul and Pablo Jaramillo Viteri, “Granting Snowden Asylum Could Help and Hurt Ecuador’s Leader,” Los Angeles Times, June 25, 2013.
Fander Falconi, “Ecuador Begins to Roar,” The Guardian, April 7, 2013.
Fander Falconi, “Heavily Oil Dependent Ecuadorean Economy Slows Down,” Economist Intelligence Unit, May 17, 2013.
Dumitru, A. (2014, December 31). Country Report: Ecuador. Retrieved from https://economics.rabobank.com/publications/2014/december/country-report-ecuador/
2015 Index of Economic Freedom, Ecuador, September 2014.
Cox, R. “Ecuador economic “miracle” meets maturity,” Reuters, September 11, 2014.

Exhibit 1: Map of Ecuador

Exhibit 2: External position remains weak

Exhibit 3: Fiscal balances deteriorates

Exhibit 4: Keys Facts
|Ecuador |
|Country and Capital | |
|Full name |Ecuador |
|Capital City |Quito (Located in the North Central part of the country. |
|Government | |
|Government Type |Republic |
|Head of Government |President Rafael Correa |
|Population |15.8 million |
|Currency |The sucre was replaced by the US Dollar as the official currency as of March 2000 |
| |at a rate of 25,000 sucres for US$1. |
|Internet Domain |.ec |
|Demographic details | |
|Ethnic composition |The population of Ecuador is about 65% mestizo (mixed Amerindian and Spanish). |
| |About 25% are Amerindian, 7% are Spanish or others, and another 3% are black. |
| |There are only a few groups of unassimilated Amerindians on the coast, notably the|
| |Colorados and Cayapas. |
|Major religions (‘05 census) |Roman Catholic 95%; Protestants 2% |
|Country area |714 km (444 mi) North-South; and a width of 658 km (409 mi) East-West |
|Language |Spanish (spoken by over 90% of the population); Quichua (dialect of the Quechua |
| |language spoken by the small percentage of the population). |
|Telephones – main line in use |2.31 million (2012) |
|Telephones – mobile cellular |16.457 million (2012) |
|Broadcast media |Ecuador has multiple TV networks and many local channels, as well as more than 300|
| |radio stations; many privately owned; the government controls 5 national TV |
| |stations and multiple radio stations. |
|Exports |Oil and agricultural products. |
|Imports |Petroleum, food processing, textiles, paper and wood products, plastics, lumber, |
| |chemicals, and fishing. |

Exhibit 5: Volunteer taking a patient’s temperature at a rural station. [pic]

Exhibit 6: Rural school [pic]

Exhibit 7: Ecuador GDP Annual Growth Rate (2000-2015)

|Exhibit 8: Ecuador GDP | | | | | | |
|Ecuador GDP |
| |Last |Previous |Highest |Lowest |Unit |
|GDP |90.02 |84.04 |90.02 |1.00 |USD Billion |
|GDP Growth Rate |1.10 |1.00 |3.40 |-1.90 |percent |
|GDP Annual Growth Rate |3.40 |3.50 |10.20 |-2.30 |percent |
|GDP Constant Prices |17541843.00 |17346195.00 |17541843.00 |9134587.00 |USD THO |
|GDP per capita |3653.00 |3568.19 |3653.00 |1572.43 |USD |
|Gross Fixed Capital Formation |4876537.00 |4759310.00 |4876537.00 |1324528.00 |USD THO |
|GDP per capita PP |10135.39 |9900.08 |10135.39 |7250.84 |USD |
| | | | | | | |
| | | | | | | |

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[1] The information is obtained from the U.S. Energy Information Administration website at http://www.eia.gov.
[2] U.S. Department of State, Background Note: Ecuador, June 8, 2011.
[3] Central Intelligence Agency, Library: The World Fact Book, February 15, 2015.
[4] The World Bank, Ecuador Overview, April 10, 2014.
[5] Brian Ellsworth and Alexandra Valencia, “Ecuador Backing for Snowden Spurs Criticism of Correa Media Law,” Reuters, June 27, 2013.
[6] Human Rights Watch, “Ecuador: End Assault on Free Speech,” Press Release, June 17, 2013; Chris Kraul and Pablo Jaramillo Viteri, “Granting Snowden Asylum Could Help and Hurt Ecuador’s Leader,” Los Angeles Times, June 25, 2013.
[7] Fander Falconi, “Ecuador Begins to Roar,” The Guardian, April 7, 2013.
[8] Fander Falconi, “Heavily Oil Dependent Ecuadorean Economy Slows Down,” Economist Intelligence Unit, May 17, 2013.

[9] Dumitru, A. (2014, December 31). Country Report: Ecuador. Retrieved from https://economics.rabobank.com/publications/2014/december/country-report-ecuador/

[10] 2015 Index of Economic Freedom, Ecuador, September 2014.
[11] Cox, R. “Ecuador economic “miracle” meets maturity,” Reuters, September 11, 2014.