Oil Prices Plunge Hits Ecuador

Today’s Washington Times features an article on Ecuador “Economic Crisis Starts to Show up in Ecuador”, in which author John Zarocostas writes:

“The global economic crisis that began in the United States has spread to several nations in Latin America – and Ecuador, an Andean nation dependent on oil exports, is among the hardest hit.”

Ecuador, is in fact, an oil-dependent economy. Over 60 percent of its $13.7 billion in exports consist of crude oil, according to the Ecuadorian Central Bank. Oil revenues finance about 40 percent the country’s budget. And according to a J.P. Morgan study, every $10 drop in the oil price would lead to an increase in the current account deficit equivalent to 2 percent of the country’s GDP, and an increase in the fiscal deficit equivalent to 1.3 percent of GDP.

In other words, President Rafael Correa’s ambitious social spending—which doubled in a year—has to slow down. The U.S.-educated economist has to reduce his expenses in the midst of his campaign for reelection, next March 2009. Correa is reluctant to do so, and has stated that he’d rather default on the country’s global bonds payments.

Mr. [Eduardo Egas] Pena, the deputy foreign minister, said the government prepared its 2009 budget assuming oil prices would average about $75 a barrel. Lately, oil has traded below $60, revealed the Times.

Despite Correa’s threats to default on what he considers “illegal” debts, J.P. Morgan forecasts that Correa’s administration may honor its commitments, in order to keep the country qualified to receive international loans to help him finance his high social spending. Since 2000, Ecuador dollarized its economy in a move to avoid hyperinflation, and therefore it’s incapable to print money to control its monetary policy through devaluation.

Ecuador, nonetheless, is only the fifth largest oil exporter in Latin America. Venezuela leads the black gold exports in the region, and it will be in real trouble as oil prices plummet—oil represents 94 percent of Venezuela’s exports.