We have been discussing the global oil price and dollar appreciation. To continue the trend, I want to present an interesting article from Bloomberg that analyzes the impact of falling oil price and stronger greenback on Ecuador’s economy.
Ecuador is the seventh largest economy in South America. According to EIA, its oil sector accounts for more than half of the country’s export earnings and approximately two-fifths of public sector revenues. Accordingly, current decrease in oil price has negatively affected its economy as the country’s rate of growth slowed for a third year in 2014. Whereas the government predicted 4 percent growth rate, GDP only rose 3.8 percent in 2014 from a year earlier.
Ecuador also uses U.S dollar as its official currency. As dollar appreciates, its domestic goods became relatively more expensive, making its other exports more expensive. Meanwhile, maintenance on Ecuador’s biggest oil refinery has cut cut local fuel output by 48 percent since July last year due to declining profit from oil export. This necessitated the government to spend more on subsidized imports to meet demand. This imbalance in export and import has caused CA deficit.
Fortunately, growth in non-oil industries have been strong. During his weekly speech to the nation, President Rafael Correa stated that agriculture, shrimp farming and electrical output, helped underpin growth. However, even this gain gets offset by the falling crude oil prices.