Tuesday, June 26, 2007
Ecuador Hurts Its Potential
The constant barrage of Bolivarian rhetoric, political intrigue and corruptions scandals are preventing Ecuador from realizing its full potential.
BY WALTER T. MOLANO
Despite the political noise, the Ecuadorian economy is doing well. GDP expanded 4.08 percent y/y in 2006 and the level of economic activity should grow 4.3 percent y/y in 2007. Ecuador's consumer prices are under control. At the end of May, the annual inflation rate was 1.56 percent. Ecuador's unemployment picture is also improving. The general unemployment rate fell below 10 percent in May.
Surprisingly, Ecuador's dollarization program is the main reason for its success. The fixed exchange regime imbued the economy with monetary stability and improved its external competitiveness. In contrast to Argentina's disastrous flirtations with dollarization, Ecuador pegged itself to the greenback during a period when it was free falling and commodity
prices were soaring. Argentina had the misfortune of pegging to it when the dollar was strengthening and commodity prices were weakening. This is why Ecuadorian exporters are doing so well, gaining against competitors - particularly Colombia. Given the 30 percent appreciation of the Colombian peso against the dollar, Ecuadorian flower producers expanded market share and improved profit margins.
Unfortunately, Ecuador could be doing better. It could be reaping large inflows of foreign direct investment. Instead, the constant barrage of Bolivarian rhetoric, political intrigue and corruptions scandals are preventing it from realizing its full potential.
HEALTHY MACRO, UNHEALTHY POLITICS
A look at Ecuador's macroeconomic data suggests that the country is nowhere near the dire straits proclaimed by President Correa. Ecuador's nominal GDP is $44 billion, with a public sector debt of $13.3 billion. In other words, Ecuador's debt to GDP is 30.2 percent, putting it among some of the better performers in the region. Likewise, the Ecuadorian government is running a small fiscal surplus. Therefore, there are no fundamental reasons why the foreign debt load should be of concern. Ecuador has the resources and cash flow to meet its obligations.
The government's real motivation appears to be political. Indeed, a delegation led by Guillermo Nielsen, the fiery Argentine debt negotiator, found no reason why Ecuador should default on its external obligations. Ecuador would not gain much from default, since it has the capacity to continue servicing its debt. At the same time, there is a good chance that Ecuador could fall off the dollar peg if it defaulted. A run on the banks could create a monetary squeeze, whereby the central bank would be forced to introduce a new currency. Unfortunately, President Correa's motivation is purely political, since he appears to gain in strength from episodes of controversy and confrontations.
A weak Administration, with no major political party, President Correa gains strength from keeping the opposition on the defensive. Unfortunately, some of his machinations were caught on tape. Most of the attention converged on Economy Minister Patino, who is the president's closest advisor. The maelstrom began when Patino was filmed discussing, with a pair of investment bankers, the implications of a possible default on the prices of Credit Default Swaps (CDS). Although Ecuador vowed to default on its external debt, it serviced its obligations on time. It now appears that the threat was a ploy to manipulate bond and CDS prices.
HURTING ECUADOR'S REPUTATION
The second incident again involved Economy Minister Patino. This time it was with Jorge Cevallos, the President of the Congress. The minister and congressional leader were filmed negotiating a loan for a special pet project in return for Cevallo's support for a constitutional assembly. Many people were surprised when the congressional leader agreed to the constitutional assembly. However, now it seems that the congressional leader was bought off.
The political noise is hurting Ecuador's reputation and standing. Many multinationals are holding off investment. Hence, the country is losing a golden opportunity. Unfortunately, the personal ambition of a small group of politicians lies ahead of the needs of 14 million Ecuadorians.
Walter Molano is head of research at BCP Securities.