Alphacast Highlight: Keeping Up With Ecuador's Economy
By Maia Mindel (mmindel@alphacast.io)
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The Ecuadorian economy continues slow recovery from COVID. Given that the economy was already in a recession by 2019, Ecuador was hit particularly hard by the COVID pandemic - with a GDP contraction of 9% in 2020 and a slow recovery of 4% in 2021, with an even lower expected rate for 2022 - resulting in a similarly unimpressive labor market. Unlike most other countries, inflation in Ecuador has increased but not to extraordinary levels, resulting in a more beneficial real exchange rate. Perspectives remain muted, with slow but steady growth and no real changes in inflation, although the country's financial position may face complications in the future.
The real economy and labor market show little room for improvement. Following a tepid performance in the years prior to the pandemic, the Ecuadorian economy has recovered slowly and moderately from the steep contraction it suffered in 2020. Real GDP remains more than 2% below pre-pandemic and pre-recession levels, with employment seeing a bumpy but progressive recovery. Given this, and the fact that both employment and output seemed stagnant over the previous decade, it is unlikely that growth takes off in Ecuador in the near future, not without significant policy changes.
Inflation has not proven a major challenge to the Ecuadorian economy. Given the fact that Ecuador's official currency is the US dollar, it has enjoyed a remarkable degree of price stability over the past 15 years. However, the weakness of the domestic economy was reflected on the fact that the country suffered moderate deflation before the pandemic, which worsened during 2020. The price level acccelerated in mid 2021, as a result of fiscal stimulus policies and international commodity prices, as well as the acceleration of prices in the United States, but has grown far below international standards - around 4% in Q3-2022, compared to twice that rate for the United States and even higher levels for its LatAm peers.
Ecuador's real exchange rate depreciates, while the country's financial position suffers. Given low inflation (versus international rates) and increases in the price of commodities, Ecuador's real exchange rate has gained signficantly, growing 3% above mid-2019 levels. However, Ecuador's financials seem to be facing major trouble, with the country's renegotiation with the IMF having raised risk premiums to their highest levels in 20 years. Recent developments such as the declining intenrational price for oil and political conflict have raised the risk premium after a year of relative stability.
