Growth in Ecuador may continue its upward trend in early-2012 as a series of supply shocks and geopolitical risks keep oil prices elevated, according to Capital Economics.

With average Oriente crude prices rising by around 35 percent year-on-year in 2011, the economy seems to have grown by over 8 percent. Despite stagnant production growth, the strength of oil prices helped prevent a further deterioration of Ecuador’s trade deficit in Q4, giving the government room to maintain heavy social spending, says Capital Economics.

Loans from China remain a crucial source of financing and have helped fund a current account deficit since 2009, adds Capital Economics. The government announced a new $1 billion bilateral loan in January and is expecting a further $1.7 billion by mid-year. Put together, these measures equate to over 4 percent of the GDP, adequate enough to cover the current account shortfall.

According to Capital Economics, this has taken some of the near-term pressure off the administration to engineer a return to debt markets. Despite Ecuador’s relatively low public debt profile, perceived political risks mean that the government would probably need to offer yields of at least 9 percent. As long as oil prices remain in triple digits and China remains a willing source of finance, a sharp near-term slowdown will be avoided.

As such Capital Economics has increased the 2012 growth forecast up to 4.0 percent from 2.0 percent previously, and continues to expect an expansion of just 2.5 percent in 2013.

Lower oil prices present the biggest threat to the sustainability of the current model, says Capital Economics. Meanwhile, inflation should ease gradually in 2012 as the effects of a food price spike in early-2011 fade. Nevertheless, tightness in the domestic economy will temper any falls.