As drought hits violence-racked Ecuador, recession is likely

Many of Latin America's economies are experiencing some form of cyclical slowdown, but Ecuador's performance has been particularly poor. As endemic violence hurts business confidence, the tourism sector and drives Ecuadoreans to emigrate, the worst drought in 60 years is hitting key agricultural industries, draining reservoirs and causing hydroelectric dams to be shut down.

Ecuador's economy shrank 2.2% year-on-year in the second quarter -- the steepest decline since the pandemic. By contrast, real GDP growth was 5% just a year earlier.

Gang violence is dissuading visitors who once flocked to Ecuador, home to Andean rainforests and the Galapagos Islands. According to Human Rights Watch, Ecuador's homicide rate more than doubled from 2021 to 2023, increasing from 13.7 to 45 per 100,000 people. President Daniel Noboa, who is up for re-election in 2025, has driven a retaliatory battle against the drug traffickers.

In April, the International Monetary Fund estimated that Ecuador's economy would post zero growth in 2024. However, there is a high likelihood that this projection is revised lower.

The El Niño weather phenomenon has resulted in a lack of rain that is exacerbating wildfires, damaging arable land and killing livestock. As reservoir levels shrink, the hydroelectricity-dependent country has also suffered power cuts.

Combined, the hit to growth and confidence was broad-based in the second quarter. The important construction sector shrank the most, experiencing a 17.2% year-on-year drop in the quarter. Gross fixed capital formation fell 8.2%; household consumption fell 2.2%. The only bright spot was the oil industry, where shipments surged almost 25% -- enough to push overall exports to a 1.9% growth pace.

Across the region, only Argentina (where President Javier Milei is implementing radical policies, hoping to revamp the economy) is also recording a contraction in GDP.

As a consequence of the turmoil, more Ecuadorians are moving abroad. As our second chart shows, remittances from Ecuadorians who have left the country are surging -- reaching a monthly record of USD 1.45 billion in June.

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