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Is Ecuador The Next Domino To Fall In Latin America?

220px-Quito_Centro_HistóricoThe end of the boom in commodities brought to the forefront, an important aspect of the leftist movement in Latin America. Mainly that it is economically unsustainable in the present global environment. The pattern is repeating itself as one nation after another, runs out of the money to sustain governments that came to power by promising a redistribution of wealth to the populace at large. The electoral system that brought them to power, is the very process that will now lead to their undoing.

The politicians that rode the wave of social equality through government largesse, were able to prosper when the market for commodities was thriving. The demand remained as long as global growth was accelerating. These circumstances brought immense new wealth to Latin America as a whole. The socialist leaning leadership in a number of countries, became adept at spending money in ever increasing amounts to maintain popularity.

WTO (World Trade Organization) headquartered in Guayaquil Ecuador

WTO (World Trade Organization) headquartered in Guayaquil Ecuador

Where these politicos largely failed was in creating wealth. In fact, the policies they enacted in various degrees, hampered sustainable development and economic growth. Incentives for business expansion and investment in the private sector were discouraged and often viewed with suspicion. Worse yet, foreign investors were frequently driven away by political and economic actions, made in the name of nationalism and social justice.

It became politically popular to confiscate the assets of international firms. Another fashionable trend was to default on loans owed to foreign banks, fund investors and global institutions. The public was mistakenly led to believe that this could be done with impunity, with little to no consequence. That these investors would eventually take legal action to recover their property or the financial equivalent, was largely ignored.

Macri in his inauguration as President of Argentina, on 10 December 2015.

Macri in his inauguration as President of Argentina, on 10 December 2015.

The collapse of the market in commodities would coincide with the slowdown in Asian growth, especially in China. It would bring electoral defeat to leftist governments in Argentina and Venezuela in 2015.

The economic downturn would also be the undoing of the formerly popular presidency of Dilma Rousseff in Brazil, who had won re-election in 2014. She now faces impeachment brought on by her efforts to hide the rising fiscal deficits. This action on her part had become necessary, as a result of the massive overspending that had taken place in her first administration.

For the left leaning governments still left in power, there will be the need to continue to alleviate poverty. However it will have to be balanced with offering a growing and increasingly vocal middle class, economic opportunities as well. It will be a difficult balancing act that will take acute political skill.

Keeping this in mind, pundits now wonder what will happen to the two remaining countries in South America that have definably purely socialist governments. These are the nations of Bolivia and Ecuador. They have both survived by adopting an increasingly flexible policy in the face of a difficult international economy. President Evo Morales in Bolivia and President Rafael Correa in Ecuador have maintained their public approval ratings above 50%, but have also implemented new fiscal discipline to prevent economic disaster.

President Evo Morales of Boliva addressing Parliament

President Evo Morales of Boliva addressing Parliament

Bolivia has avoided the economic calamity of some of its neighbors, by keeping foreign exchange reserves high. The country has over a years worth of cash on hand, to pay for needed imports. The government has also endeavored to hold debt levels at a very low level. This has somewhat mitigated the economic hardship, that has resulted from the near collapse in commodity prices.

In Ecuador forecasts for economic growth were 4.1% at the beginning of 2015, for the 8th largest economy in Latin America. However, this was based on a international price of oil near $80.00 USD (United States dollar). As the price of crude plummeted throughout the spring and summer, GDP (Gross Domestic Product) growth was revised downward. It was 1.9% in June and by the 3rd quarter there was a general acceptance, that there would be no growth at all. There was even the possibility that the economy would enter into a recession.

Complicating the situation is the fact that Ecuador has used the American dollar since 2000. If President Correa moved to introduce an indigenous currency, one that could be more easily manipulated by the government, it would create in his own words an unstable situation. However, the president will be increasingly tempted to stimulate the domestic economy by decoupling his nation from the American dollar.

Rafael Correa during his inaugural speech as president of Ecuador

Rafael Correa during his inaugural speech as president of Ecuador

Correa has preserved his popularity since first being elected in 2007, by generous unsustainable social spending. This included significant growth in the public payroll sector and cash transfers to well over 1 million low income citizens. It was also made possible by the superficial growth, created by the rising prices for commodities including oil. It allowed a temporary prosperity, that has now disappeared as prices for crude have plunged dramatically.

Ecuador under the presidency of Correa, has doubled public spending reaching a historic record of 44% of the country’s GDP. The country also now has a reputation of not paying debts, since the major default that occurred in 2008. At that time, the president reneged on loans and foreign debts worth between $4 to $5 billion USD. This discourages any new direct foreign investment, now at a exceptional low rate of just 0.06% and private sector growth. It results in Ecuador having one of the least competitive economies in South America.

Although President Correa has consolidated his hold on power by centralizing economic and political authority in his hands and outmaneuvering potential rivals, the economic downturn is taking its toll. The subsequent attack on the independent media, cannot change the fact that oil prices are now 50% lower than they were a year ago, and may fall even further. It somewhat complicates his possible re-election bid for an unprecedented 4th term in 2017, despite his control of the judiciary branch of government.

Presidents Fernando Lugo of Paraguay, Evo Morales of Bolívia, Luiz Inácio Lula da Silva of Brasil, Rafael Correa of Ecuador, and Hugo Chávez of Venezuela, in Fórum Social Mundial for Latin America

Presidents Fernando Lugo of Paraguay, Evo Morales of Bolívia, Luiz Inácio Lula da Silva of Brasil, Rafael Correa of Ecuador, and Hugo Chávez of Venezuela, in Fórum Social Mundial for Latin America

Instead at the present time, he wants to amend the constitution so he will be unable to run for the presidency at the completion of his present term. However, the legislation would allow a future president to serve indefinitely beginning in 2021. Political allies of Correa hold a total of 100 seats out of 137 in the National Assembly. So there is little doubt the proposal would pass.

The opposition insists that a constitutional limitation for term limits can only be changed by a national referendum. One that Correa is likely to lose if recent polls are to be believed. Of course the malleable constitutional court, has ruled that a referendum in totally unnecessary.

Ecuador relies on the sale of crude oil for more than 50% of exports and it accounts for 11.5% of the GDP. In addition,the nation relies on oil for 28% of public revenues. Under the new economic reality, the government has been forced to cut money allocated for new oil projects by about $3 billion USD in 2015. This is in addition, to the fall in production which occurred for most of 2015.

Correa has been forced to cut the national budget by $2.2 billion USD last year already. He has also been forced to raise taxes. More cuts are sure to follow in 2016, which will increase the mounting social unrest.

250px-Ecuador_(orthographic_projection).svgThe President has already imposed rigorous import and banking controls. He is also proposing new capital gains and inheritance taxes. This has angered a growing portion of those individuals that are reliant on the private sector, for their livelihood.

His attempts to cajole foreign investors outside of China back to Ecuador has been largely unsuccessful to date. Prohibitive taxes on assets of foreign businesses and the unilateral changes in legal contracts made by the government in the past make investors wary of returning to the troubled economy.

It also will force his administration to become even more reliant on his chief benefactor, the country of China. In the form of loans and investments various Chinese institutions as well as the government, have become a major factor in the economy of Ecuador. It now comprises nearly 25% of the GDP. Chinese state banks by themselves, have invested the equivalent of $10 billion USD in various domestic projects.

The cost to service these loan continues to mount. China will control a majority of the natural resources of Ecuador for years to come. Nearly 90% of the country’s oil exports are now being used to finance the loans, that were acquired from China. Many people in Ecuador are unaware of the increasing influence of Chinese authorities, over the economic and political developments inside their country.

Ecuador President Correa at Coca Codo Sinclair hydroelectric project funded by China.

Ecuador President Correa at Coca Codo Sinclair hydroelectric project funded by China.

Foreign observers may be asking why President Correa would rather be out of office, near the end of the decade? The answer is rather simple. The recent decision made by OPEC (Organization of the Petroleum Exporting Countries) of which Ecuador is a member of, was to permit unlimited production and sales of crude.

This determination is ruinous to his country’s economy. He would rather not be held responsible, for the nearly catastrophic effects this will have on Ecuador, already reeling from misguided fiscal policy.

In 2021 he will be able to return to power, with his reputation and popularity largely intact. Or so he hopes. His plan will rely on installing a caretaker government that will hold power, until he is ready to resume the presidency. The deal will resemble what occurred in Russia with Vladimir Putin and his prime minister.

Quito capital of Ecuador, a modern and growing Financial District

Quito capital of Ecuador, a modern and growing Financial District

The oblique plan has definable risks. What if the stand in, refuses to relinquish power when he completes his term? That is he could also run for re-election. This individual could also lose the election in 2017. A declining economy may well open up opportunities for new political candidates. So far the name most often heard for a replacement to President Correa is Lenin Moreno, who is somewhat popular in his own right.

Another possibility is that Alianza Pais, the party that President Correa dominates, may suffer major electoral losses, as a result of a collapsing economy. This would make the next president a lame duck. That is without a working majority in the legislature, the president would be far more limited in the exercise of power. It has been the problem in Ecuador, since democracy was restored in 1979. This would be a disastrous outcome for Correa.

Although President Correa has announced he will not be a candidate in the next election, is is obvious he will attempt to remain one of the most powerful political brokers in the country. Whether that will include being the president of Ecuador again beyond 2017, is uncertain. Much can change within the country over the next five years.

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