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Monday, December 03, 2007

Ecuador: Keeping Up With Hugo

The lack of investment is making Ecuador one of the slowest growing countries in Latin America.
Ecuador's president Rafael Correa wants to follow Hugo Chavez, but lacks the resources to do so, the author argues. (Photo: Ecuador President's Office)


Not to be left behind by his Venezuelan ally, Ecuador’s President Rafael Correa is moving ahead with a new constitution.

In September, President Correa and his Alianza Pais (AP) party secured a majority in the new constitutional assembly. Having cobbled together a grassroots movement to combat the traditional political parties and entrenched interest groups, President Correa is plowing ahead with changes that promise to overhaul the nation’s institutions. The president is vowing to implement reasonable reforms, such as the separation of powers and an independent judicial system, but he is also pushing for measures that will give him more control over the economy.


Like President Chavez, President Correa is pushing the so-called Socialism XXI agenda by advocating direct control of the energy sector, better distribution of wealth and the ability to nationalize private property. As was the case in Venezuela, the new initiatives are scaring the private sector and producing a decline in fixed investment. Although the new measures will allow the Ecuadorian president to consolidate his powerbase, it could also lead to a deterioration of the country’s capital stock.

Unlike Venezuela, Ecuador is not booming. The Ecuadorian Central Bank recently revised its 2007 GDP growth forecast to 3.4 percent y/y from 4.1 percent y/y, and some local economists believe that final number could be closer to 2 percent y/y. Fixed investment fell 2.3 percent y/y during the second quarter, marking the second largest decline since the 1999 default. The nationalization of the oil sector is increasing government revenues, allowing the public sector to expand expenditures. Government revenues improved 28 percent y/y to $8.69 billion in 2007, or 20 percent of GDP, and outlays rose by 30 percent y/y to $8.88 billion. However, total oil production is declining as investment evaporates. The increases in government spending and social assistance programs boosted consumption, thus offsetting the decline in investment. This allowed Ecuador to post a modest expansion.


Nevertheless, the lack of investment will make Ecuador one of the slowest growing countries in Latin America. Fortunately, soaring oil prices left the central bank with $2.5 billion in international reserves, a massive windfall for a such a small country. The government hopes to use the resources to improve investment and social programs. However, the increase in consumption will push up the import bill, and it may leave Ecuador with a current account shortfall. Likewise, the increases in public expenditures will leave the government with a gap of 0.4 percent of GDP in 2007.

The improvement in external conditions allowed Fitch to revise Ecuador’s sovereign debt outlook to neutral from negative, but the overall rating remained the same. President Correa also softened his rhetoric, saying that Ecuador would continue to service its debt as long as it had the resources to do so, which is the case for every country on the planet. In sum, President Correa’s initiatives are strengthening his powerbase and ensuring that he will remain in office for the foreseeable future. As was the case with President Chavez’s Bolivarian revolution, President Correa’s initiatives are boosting consumption.


However, the measures are disincentives for investment, resulting in a gradual depletion of the country’s capital stock. The erosion of the capital stock forces a country to rely more on imports and weakens the external accounts. Given the huge size of Venezuela’s oil sector, it can sustain a simultaneous erosion of the capital stock and an increase in imports for a moderate amount of time. However, Ecuador’s oil production is much smaller and in worse shape. Therefore, Ecuador could get into trouble relatively quick.

Although President Correa may be trying to keep up with Venezuela, it may not have the resources to implement a similar program.

Walter Molano is head of research at BCP Securities.

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From: kdg

You're right, Ecuador is not Venezuela. Correa is not looking to reform his country the way Chavez is. Correa is a bright economist who is attempting to bring the 50% of his country who are in poverty into a capitalist system through a foundation of socialist type reforms. He is not looking to create a pure socialist state in the manner of Chavez. You are wrong to say that Ecuador will rely more on imports. He is ensuring the growth of domestic production by setting higher tariffs on imports. This will prevent the erosion of a manufacturing sector that has been on the decline due to a flood of cheap imports

From: mike

Correa is a demagogue that is taking advantage of the ignorance Ecuador's impoverished citizens and by using partisan Bush/Cheney scare tactics. For example, he has given huge public works contracts to the Ecuadorian military - to establish a fragile partnership. He had also created a new political party that is composed of second-tier corrupt politicians.

From: Chase

Terra Firme
Like most socialists Correa has noble "stated" goals. But also like most leftist/socialists, the stated goals seem to always end up different than what is really accomplished. What we see now is the main focus of Correa is not the impovrished people of ecuador but rather gaining more political power for himself and eventually creating a system where he can remain in power even after he should no longer be president.

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