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Investments in oil projects in Ecuador announced on October 5

On October 5 the government of Ecuador signed four Oil & Gas contracts with Mexican, Venezuelan and Ecuadorian companies for the exploration, development, and exploitation of oil fields in Amazonian provinces, near the borders with Colombia and Peru. The companies will reportedly carry out drilling, reactivation, construction, and expansion of current oil facilities. In addition, the government has also signed two amending contracts with other companies. The total private investment expected for the six contracts adds up to 1.6 billion USD. The agreements will reportedly result in production increases for the next 15 years. The state would supposedly obtain approximately 1.8 billion USD in additional revenues in the period up to 2032. Furthermore, between October 1-5 international oil prices rallied to the highest level since November 2014, with WTI Crude, the reference for Ecuadorian oil, hitting 75 USD the barrel.

Even though these developments are positive for the Ecuadorian economy, it is not necessarily poised to grow in the short term. The International Monetary Fund (IMF) recently reduced expected growth figures for Ecuador during 2018 and 2019. Whereas in April 2018 the IMF estimated that Ecuador’s Gross Domestic Product (GDP) would grow 2.5% in 2018 and 2.2% in 2019, in October the IMF reduced these figures to 1.1% (2018) and 0.7% (2019). One of the main reasons for the negative changes in these projections is the government’s attitude toward reducing public investment so as to reduce deficit. In this context, while efforts to attract private investments in the energy sector are seemingly yielding capitalization, the newly-signed contracts are not likely to result in short-term benefits. Taking into account that Ecuador’s economy is reliant on oil, international crude prices constitute a key variable on macroeconomic forecasts, determining the amount of revenue that the Treasury will have to pay expenses in 2019. While oil prices are currently surging owing to expected lower outputs from Iran, Ecuador’s oil industry is not sufficiently important to have an impact on global prices. Considering that between January and September 2018 outputs of crude oil fell 3.5% compared to the same period in 2017, Ecuador could potentially face challenges in adjusting its production to surging oil prices, losing the opportunity of substantial profit. In any event, growth estimates for Ecuador are also hindered by rising U.S. interest rates, which undermine the prospect of attracting investment to the country, especially given that its economy is fully dollarized. This translates into less competitive exports when compared to countries with national currencies of their own.

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