In year 2000, the Ecuadorian economy was on the verge of complete collapse with an insolvent banking system, political instability & public unrest and hyperinflation at its doorsteps. Then President Mahuad in early January 2000 declared a state of emergency due to the dire straits of the Ecuadorian economy. The national currency at that time, the ‘sucre’ was imploding in value depreciating by 65 percent versus the US-dollar (USD) year over year. Consequently, President Mahuad announced on January 9, 2000 that Ecuador will seek to replace their national currency with the USD. The decision to
‘US-dollarize’ Ecuador’s economy was viewed as quite popular by the Ecuadorian people who experienced a massive drop in their standard of living. However, dollarization limits the Ecuadorian government’s ability to print money and to help shield itself from any external shocks to the economy.
By January 21, 2000 a political coup had taken place with the military joining demonstrators who represent indigenous Ecuadorian Indians, workers/labour movement and left leaning activists. Under diplomatic pressure from the United States, then Vice President Gustavo Naboa took over the Presidency which helped to stabilize the political environment and prevent international isolation from occurring, thus helping Ecuador to maintain foreign investment and foreign aid. By April 2000, President Naboa caretaking a government in crisis mode completed the process for full US-dollarizaton as Ecuador’s new national currency in a desperate move to stop hyperinflation as inflation was running at 100 percent annually and to prevent anarchy from taking over. Fortunately, the currency decision worked as social unrest and protests quieted down coupled with the return of economic growth by year 2001. Since this time, many can argue that US-dollarization to date has been a relative success for Ecuador with the return of stability although many challenges lie ahead.
POLITICS: President Lucio Gutierrez is presently in power since January 2003, an ex-coup leader and formal army colonel is a a leftist nationalist backed by many within the indigenous Indian movement. President Gutierrez obtained power on a platform to fight corruption and to push ahead with pragmatic reforms to return Ecuador on a path to sustained stability as he supports US-dollarization unlike many of his leftist peers. He won a November 2002 Presidential election over banana billionaire Alvaro Noboa, no relation to former Vice-President and President Gustavo Naboa. Ecuador has been shaken badly with political instability for a long time, more recently evident with six Presidents taking power over the last 8 years resulting in political deadlock making it difficult to pass new reforms to the benefit of the nation. The political coup in January 2000 resulted in the removal of then President Mahaud with Gustavo Naboa taking over as a result of heavy US diplomatic pressure from the short lived Ecuadorian military officials holding power. The coup was undertaken from a banking, currency and corruption crisis that was enveloping Ecuador at that time.
ECONOMY: rebounding from the 1998-2000 depression where GDP growth fell by 7.3 percent in 1999 and the fiscal deficit exploded to 4.9 percent of GDP coupled with high external debt - its worst economic crisis in 70 years attributed to low oil prices in 1997-98 and political deadlock. Ecuador is a market economy although heavily commodity based in areas of petroleum & agriculture. At present, Ecuador’s economy is improving with the return of economic growth and lowering of inflation to only 6.86 percent year over year for October 2003 and a national total public debt which now stands at a respectable 51 percent of GDP from over 100 percent in 1999. Economic difficulties do remain with only one in three in the labour force having full time work. Ecuador was technically in default in 1999-2000 as it missed a payment and defaulted on the Brady bonds - the first country to do so. Ecuador is the world’s largest exporter of bananas as it also normally runs a trade surplus. Remittances from Ecuadorians living abroad form a major source of foreign exchange valued at $1.4 billion USD in 2001. Although the oil economy is the number one foreign exchange earner for Ecuador via its state-owned company Petroecuador, remittances do form an important role in supporting the country’s capital flows.
Economic Statistics:
GDP as measured by purchasing power parity is at $41.7 billion USD (2002) and corresponding GDP/Capita at $3,100 USD assuming 13.6 million citizens. GDP at market prices is at $18 billion USD, year 2003 nominal GDP at $25.8 billion USD. GDP growth for 2001 at 3.3 percent, 2002 at 4.1 percent, growth for 2003 forecasted at 3.1 percent and year 2004 estimated at 5 percent. Inflation figures have year 1997 at 30 percent, 2000 at 60 percent for the year with a peak close to 100 percent in the fall, 2001 at 22.4 percent as the economy adjusts to dollarization, 2002 at 12.5 percent, inflation for 2003 at 8.2 percent, 2004 projected at 4.4 percent. Fiscal deficit for year 1999 at 4.9 percent of GDP, 2001 at 1.1 percent and the fiscal accounts are now balanced running at zero to plus 2 percent of GDP although year 2004 projected surplus is at 3.2 percent. Trade deficit for 2002 came in at $1.1 billion USD. Current account deficit for 1998 at 10 percent of GDP reversing to a surplus in 1999-2000 at 4.5 percent of GDP after the sucre currency crashed, year 2003 current account deficit at 5.3 percent and 2004 projected at 4.1 percent. Year 2001 net foreign debt at $14 billion USD, external debt peaked in year 2000 at 150 percent of GDP. Exports include oil, bananas, cocoa with the United States and Peru the majority buyers. Oil production for year 2001 at 421,000 b/p/d as it represents 20 percent of the economy, 50 percent of government revenues and 45 percent of Ecuador’s exports. Official unemployment is at 10 percent, well down from 17 percent but the real number is higher with mass underemployment.
POSITIVE: IMF support and member of WTO since 1996, good literacy levels, high world oil prices. CONCERN: unequal income distribution, widespread poverty, large increases in public payroll, fallout of from weather pattern El Nino, volcanic activity outside the capital city Quito, Ecuadorian exports not as competitive in the region due to dollarization.
BANKING SYSTEM: rehabilitated with a US-dollarized economy as confidence has returned. The Central Bank of Ecuador has no ability to conduct monetary policy thus eliminating the option to inflate. During the crash of the Ecuadorian banking system in 1999-2000 as the domestic economy & sucre currency went into freefall, upwards of 16 banks closed or were intervened and accordingly taken over by the state. This resulted in much of the banking system collapsing or 70 percent of the financial institutions becoming insolvent and many now still under state control. During this time, the government freeze implemented a banking freeze on savings accounts as a run on savings accounts began in March 1999 and a freeze on demand deposits up to equivalent of $4,000 USD. Further, banking holidays were implemented in attempt to maintain control and slow the capital flight of which 30 percent of the deposits were have estimated to leave the banking system offshore after the freeze was eliminated. The current active interest rate is in the range of 17 to 23 percent. Liquid international reserves as at October 24, 2003 at $1.402 billion USD.
REGIONAL: Colombia, Peru, Venezuela, Panama, El Salvador, Brazil
The region is well known for its volatility, political instability and violence most notably in Colombia and Venezuela. Panama has built a successful vibrant economy due to its long history of US-dollarization. El Salvador follows a dual currency regime with the USD as majority currency. A spillover affect is the violence and drug operations from Colombia and the looming influence of Colombian guerilla group FARC. Within Ecuador, there have been rumblings from FARE (Revolutionary Armed Forces of Ecuador) - still a minor player and most likely not to destabilize Ecuador unlike what FARC has done to Colombia. When Brazil devalued the Brazilian real in early January 1999, currency selling pressure intensified for Ecuador’s sucre currency further leading to devaluaton pressures in Ecuador. Similar to Brazil, Ecuador is following with a movement to centre-left leaning political leadership.
KNOWLEDGE: Ecuador rich in oil has had heated debates about its construction and transporation of two major oil pipelines that feed ports on Ecuador’s Pacific coast from rich oil deposits in the Amazon basin that run over the Andes mountains. The second oil pipeline that started construction in 2001 is projected to overshoot the initial cost of $1.1 billion USD to build, the projected increased movement of oil will expand oil exports by 50 percent. Terrorism and security to the oil pipeline is a key issue as disruptions from FARE, other leftist opposition groups and indigenous Indians whom are environmental sensitive area are real possibility. Other concerns include both landslides and earthquakes that could disrupt oil transportation. Ecuadorian Indians opposition slowed the oil energy resource development for decades. It should be noted that the four million Ecuadorians of Indian descent, the majority oppose US-dollarization and market policies. Ecuador must diversify its economy as it does remain vulnerable to low world oil prices. Will oil prices fall with increased Iraqi production scheduled to come online over the next couple of years? Greater consumption demand from countries like India & China and the expected further decline of the USD to a trade weighted basket of currencies by another 30 percent may very well help to insulate Ecuadorian exports in pricing.
CURRENCY: ISO symbol for Ecuador’s parallel currencies are ‘ECS’ and ‘USD’, Ecuadorian sucre, US-dollar. At time of review on November 14, 2003, the US-dollar was valued at $398 USD for 1 oz/gold. The ‘dollar coup’ has taken place as the USD was made legal tender in Ecuador on January 9, 2003 and full US-dollarization by April 2000 was reality as Ecudor’s currency crisis that played out from 1998-2000 destroyed the value of the sucre. The USD accounts for almost 100 percent of the transactions now although the sucre remains as legal tender at a fixed exchange rate of 25,000 ECS to
1 USD. It should be noted that the Central Bank of Ecuador no longer prints sucres as the sucres are only used for minor transactions.
CURRENCY HISTORY: in 1998-99, the Ecuadorian Central Bank three times adjusted the trading band until finally the sucre was floated in Febuary 1999. Historical valuations of the former sucre currency include: year 2002 at 25,000 ECS to 1 USD, 2001 at 25,000, 2000 at 24,988, year 1999 average at 11,786 (January 1999 at 7,000 and by December 1999 at 21,000), year 1998 at 5,446, 1997 at 3,988, 1996 at 3,189, 1995 at 2,564, 1994 at 2,197, 1993 at 1,919. The transition to the US-dollar was relatively easy as the financial system in Ecuador already had a high level of USD participation.
CURRENCY FORECAST: higher oil price is currently providing for stability within Ecuador. With US-dollarization, Ecuador has lost all control over the currency’s value and purchasing power thereby at the mercy of the political events of America. For further information on the soundness of the USD, please visit the currency opinion as presented by BankINTRO.com under ‘UNITED STATES OF AMERICA’ in this BI.C currency index. The USD has brought increased foreign investment, stability, higher GDP growth rates and a lowering of interest rates. Will another national currency such as the sucre return in the future? Maybe but unlikely in the medium term. Only if Ecuador can manage to maintain political stability, eliminate the corruption thus avoiding the social unrest.
UPDATED: November 14, 2003
