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Monday, August 13, 2007

Ecuador: Getting Ugly

The erosion of Ecuador's political and macroeconomic conditions is putting it on a trajectory to debt default - or the end of Correa's presidency.
Ecuador President Rafael Correa. His interference in the energy sector and the nationalization of the Occidental facilities has led to a slowdown in oil production, the author points out. (Photo: Ecuador President's Office)


The situation in Ecuador is becoming ugly, as the country gears up for the Constitutional Assembly. The next two months will be turbulent as the parties vie for seats. President Correa is preparing for a showdown, and he is taking a page out of President Chavez's Bolivarian Revolution. However, President Correa may find himself with an undesired outcome.

After an auspicious start, President Correa's popularity is faltering. His initial approval rating was 73 percent, and it reached 76 percent in April after he won overwhelming support for a Constitutional Assembly. However, that was the peak, and it has been declining ever since. Last week, Correa's approval rate was 59 percent and falling. His disapproval rate was 34 percent. A decelerating economy may be partially to blame. The Ecuadorian economy grew 1.2 percent y/y during the first quarter, the lowest growth rate in four years. Political noise and constant threats to default drained credit from the marketplace.

Construction dropped 1.3 percent y/y during the first quarter. The expansion of consumer credit was one of the major benefits of dollarization. It allowed households to take long-term loans for automobiles, homes and spending. As a result, private consumption boosted Ecuador's GDP. However, President Correa's aggressive posturing, and former Finance Minister Patino's constant threats to default, forced the banks to trim their lending activities. Likewise, many Ecuadorian banks found themselves with less access to external credit lines, adding to the loss of liquidity. The Ecuadorian central bank recently lowered its 2007 growth forecast to 3.4 percent from 4.1 percent, and many economists are cutting it below 2.5 percent.

More importantly, Ecuador's balance of payments is eroding. Exports dropped 2.4 percent y/y during the first quarter, despite high oil prices. In theory, Ecuador's external position should be in excellent condition. Commodity prices are high, the dollar is weak and Ecuador has an enviable competitive advantage against its neighbors. However, the government's interference in the energy sector and the nationalization of the Occidental facilities led to a slowdown in oil production. The value-added component of oil-related activities fell 14 percent during the first quarter, and investment into the oil sector is evaporating. Therefore, Ecuador may find itself in a tough situation.


The noose is tightening. Already under fire for corruption, President Correa is witnessing the erosion of his country's macroeconomic fundamentals. This is pushing down his popular support, and it could signal the demise of his presidency. Hence, President Correa is taking a page from President Chavez's Bolivarian Revolution by co-opting the military. He lavished large wage increases to the military and awarded the Army Corps of Engineers the concession to repave the nation's highways - a contract that will be a windfall for many senior officers. Moreover, President Correa is calling on the military to perform their patriotic duty to maintain stability. Instances of social unrest are rising as Ecuador gears up for the Constitutional Assembly. Given the tenuous environment, the Correa Administration softened its rhetoric on default-vowing to remain on current on debt payments. Instead, government officials suggested that they would like to reprofile the foreign debt by 2010.

Ecuador may no longer be threatening to default, but the erosion of the country's political and macroeconomic conditions is putting it on a trajectory where it may have no other choice.

Walter Molano is head of research at BCP Securities.

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From: K Gratt

New York, USA
You are obviously unaware of the corruption that has plagued Ecuador's congress for decades. You fail to consider many of the positive aspects of Correa's attempt to bring the poor into the economic fray. He is creating job opportunites that will pay off down the road. You are short-sighted to rely on near-term economic numbers. Ecuador has been neglected and takes time to rebuild. Correa is not Chavez, he does not believe in across-the-board socialism.

From: Mas

I suspect that many of Correa's problems will disappear once the constitutional referendum is held and new elections result from the implementation of the new constitution. Correa's popularity is high enough now to win majorities in all future elections. He was too unknown when the current congress was elected, and this gave the corrupt opposition more power than they should have emerged with.

From: Ramon Cienfuegos

U.S. of A
long live the revolution !!!! homeland or death !

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