Ecuador sinks deeper towards state of outright crisis (Opinion)

Posted on August 12, 2016 • Filed under: Economy, Ecuador, Ecuador Emergency, Politics
Ecuador Unsteadied
Low oil prices. A stronger dollar. The aftermath of an earthquake. A looming general election with no clear outcome.

Every day Ecuador sinks deeper towards a state of outright crisis. In the face of an economic contraction, the country must overcome enormous obstacles to recovery and growth. Its politics do not offer a clear way out and look more unpredictable every month.

At the same time though, Ecuador has not been as devastated by low oil prices and economic mismanagement as, for example, Venezuela has been—nor are its politics as polarized or authoritarian. Unlike Venezuela, political and economic changes still seem possible, and whoever wins the 2017 general election will have the opportunity to mend past mistakes and implement necessary economic reforms. A return to prosperity, however, is only possible if President Rafael Correa is able to fend off economic chaos and allow for a smooth, stable transition.

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Economic Aftershocks

The biggest challenges ahead are economic, as the country’s macroeconomic model grows ever more in need of reform. Under Correa, high levels of public spending, which increased more than threefold between 2006 and 2014, have been a major component of the economy. His party, Alianza PAIS, aimed to leverage government spending into economic investment, in large part through empowering the country’s least well-off and by obtaining contracts with the private sector in order to place the government at the helm of the economy. In doing so, the government attempted to shift away from the country’s dependency on oil and towards other domestic industries. There have, to be sure, been some successes: between 2007 (when Correa assumed office) and 2015, “multidimensional” poverty decreased by 16%, with 1.9 million Ecuadorians lifted out of poverty; average GDP growth has been nearly 4%, higher than the region’s 3% average; 80% of education is now public (though a similar increase in the quality of education is missing) and substantial investments have been made in new roads, along with new public hospitals and education centers

But 33% of the government’s revenue from 2007-2015 has come from oil, versus 26.8% in the 2000-2006 period before Correa, making much of his investment contingent on external circumstances. Lower oil prices have affected the rest of the economy, as the non-oil sector has fallen by about 3% this year. The adversity will continue: for the economy to grow, prices must move upwards of $90 per barrel. Beyond oil shocks, the dollar’s appreciation has made Ecuadorian exports less competitive. Because Ecuador’s economy was dollarized in 2000 (the country now lacks its own currency) the government has no escape valve to devalue and is effectively tied to the dollar as it soars upwards. At the same time, a negative economic outlook has induced capital flight (also made easier by dollarization), resulting in a negative net balance of payments. In response, the government has increased capital controls and tried to incentivize the usage of a new electronic currency mechanism. Correa still insists that his government’s investments will pay off—for example, through the creation of a new oil refinery that will eliminate the country’s dependence on foreign refining. Yet the project is expected to need further external funding (from China and South Korea), which will likely lead the government to breach the debt-to-GDP ceiling established by law at 40%.

The country was dealt an even bigger blow in April when a 7.8 magnitude earthquake hit the country’s northern coast. At least 650 people were killed and almost 30,000 were injured. Reconstruction costs are an estimated $3.3bn—67% will be borne by the public sector, which includes funds from the World Bank, the Inter-American Development Bank, CAF—Development Bank of Latin America, and the International Monetary Fund, while the other 33% will come from the private sector. The recovery will take years, and aftershocks continue to remind Ecuadorians of the disaster: two additional quakes, of magnitudes 5.9 and 6.1, hit the same epicenter on July 11th.

In many ways, Correa has suffered from the aftermath of the earthquake. In response, the government implemented a law that, amongst other things, temporarily raises the VAT by 2% and makes people earning $1,000-$5,000 a month donate one to five days’ worth of their salaries (according to how much they earn). Many question whether such a tax increase will do more harm than good by suffocating consumption in a time of economic distress. Correa’s administration also faced broad criticism for having insufficient emergency funds to handle the situation without acquiring further debt and was accused of placing Alianza PAIS stamps on donation packages from abroad.

In part because of the earthquake, the IMF predicts Ecuador’s GDP will shrink by 4.5% in 2016. Many short-term economic reform policies—such as currency devaluation through de-dollarization—are politically unfeasible and, in the short term, likely to cause more harm than good. A long-term approach, even in the light of current hardship, is necessary. The Correa government, realizing this, has pursued a trade-heavy agenda, including a push to reach an agreement with the EU—set to be signed this November the 11th or earlier—before Ecuador’s access to the European General System of Preferences expires at the end of the year. The government has also aimed to restart trade talks with the United States, which have been absent since 2013 following political altercations between the two countries. The Minister of External Commerce, Juan Carlos Cassinelli, is in the process of meeting with domestic and external actors, including visits to South Korea and China, to promote exports. Even in the face of such challenges, trade alone is not a panacea; a true economic recovery will demand deeper reforms—like attracting private and foreign investment to production in manufacturing and industry—as well as political action, both of which are dependent on the political track the country decides to take in 2017.

Setting the Political Stage for 2017

Likewise, domestic political dynamics ahead of the country’s 2017 general elections are faltering as they struggle to define a stable way out of the current crisis. Both Alianza PAIS and the opposition have yet to present a clear presidential candidate for October 2017. Since the government-controlled National Assembly passed a constitutional amendment that allows for indefinite presidential reelection starting in 2021, at present Correa is barred from running in this election. He has repeatedly said he “needs a rest” from the presidency, and that his decision is final. Despite throwing in hints that he might go back on his word and some far-fetched initiatives proposed by some of his allegedly independent sympathizers to pass a referendum that would allow Correa to run in 2017, he is highly unlikely to be on the ballot.

Correa’s declining approval ratings show how Ecuadorians won’t particularly miss him, and if he were on the ballot he might well lose. He began his presidency with a 68% approval level, but that figure dropped to as low as 41% in December 2015 and 35% in May 2016 according to a Cedatos – Gallup poll (which uses a larger geographical sample than other polls with higher results). Furthermore, people want changes: 75% of those polled believe that the country’s economy is heading in the wrong direction as of July 2016.

What those changes will be is still uncertain. One of the main opposition figures, the businessman Guillermo Lasso of the CREO party—who lost to Correa by 35% in 2013—would, according to polls, now defeat him in a rematch by about 2%. But with Correa off the ticket, Lasso struggles to obtain a lead against Alianza PAIS’ leadership.

Correa’s successor is likely to be one of PAIS’ two Vice-Presidents: current VP Jorge Glas or former VP Lenin Moreno. The consensus is that Moreno is the stronger of the two candidates. Polls that include other opposition figures show that Lasso would defeat Glas in the first round of voting by 4%, but he would lose to Moreno by 13%.

If Lasso is to overcome residual support for Alianza PAIS as a party, he needs to find a way to consolidate the opposition vote. Doing so, however, will be difficult. The main coalition of several parties, Unidad, has fractured after one of its parties (the Partido Social Cristiano) chose to announce its own candidate, Cynthia Viteri, without the full consent of the rest of the coalition. Even if the Unidad parties formally agree on a common candidate, Guillermo Lasso plans to run separately under the CREO banner. Lasso has expressed willingness for dialogue with some Unidad members (such as Quito mayor Mauricio Rodas and Azuay prefect Paul Carrasco), but not with one of the leaders of the coalition, Jaime Nebot (Guayaquil’s Mayor).

The irony is that the opposition parties—which range from center-left to center-right—all have similar policies. Above all they aim to repeal much of Correa’s legacy, such as the 2013 Communications Law (which the opposition says limits free speech), as well as reducing the state’s role in the economy in favor of private industry and reduced tariffs. Most conflicts within the opposition seem to be personal. For it to win, it will likely need a joint ticket, with Lasso for President and a Unidad member for Vice-President. But at present such an agreement seems unlikely.

For now, the only sure prediction in Ecuador seems to be continued uncertainty. Alianza PAIS might very well end up losing the next elections, especially if the economic situation keeps getting worse, but Correa may also find a way to salvage his struggling economic project before the elections take place. Many suspect that his true goal is to leave the presidency but continue to govern through a surrogate—or pin the coming hardships on a scapegoat, should the opposition win—and make a comeback in 2022.

But for the time being, it seems, the country will have to live on a treacherous middle ground somewhere between a total economic crisis and an opportunity for reform. For President Correa, this means that stability—both in politics and economics—should be the first priority. In the economic front, this might be achieved by promoting private industry and collaboration between the public and private sectors, more accessible lines of credit, a shift away from oil and oil-denominated external debt, reduced tariffs on manufacturing inputs, lowered costs of doing business, and a socially responsible openness to foreign investment. Politically, there is a critical need to increase dialogue and cooperation between the government and the opposition. At the same time, the government must listen to the people’s demands for less state censorship, fewer bureaucratic hurdles, and an end to name-calling and threats between the President and his opponents. Correa must show that his “Citizen’s Revolution” is for the citizens, even if they don’t support him—and not just for Alianza PAIS. Read Full Article

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