Previous Quarterly Editions
Expropriation Risk: 53 53 51 49 Political Violence Risk: 69 71 72 72 Terrorism Risk: 54 54 55 55 Exchange Transfer and Trade Sanction Risk: 45 45 43 43 Sovereign Default Risk: 70 68 65 63
TREND ▼ OUTLOOK ►
Investigations continue into the Ecuadorian operations of Odebrecht, the Brazilian construction company, as new information suggests that it provided illegal financing to Rafael Correa’s ruling Alianza Pais (AP) during his presidency. In August, the Attorney General requested preventative prison sentences for Correa and several other high-ranking members of his government in relation to the case. Correa may face extradition from Belgium, where he has been living since leaving office in 2017. The revelations are another blow to AP, which performed poorly at the local elections in March and is completing a remarkable political transformation from ruling party to marginal player. Right-wing parties are likely to benefit from the space left by AP in the coastal region, while centre-left and indigenous parties are likely to make gains in the highlands and eastern lowlands. Correa still plans to establish a new party to challenge his successor, Lenin Moreno, when he seeks re-election in 2021. Meanwhile, President Moreno has continued to steer economic policy back towards orthodoxy after the Correa years, with his government working to reduce public spending and shrink the size of the state. However, progress in this area has slowed in recent months as the government struggles to comply with the conditions attached to the 4.2-billion-dollar loan agreed with the IMF in February. Moreno has not been helped by continuing weak growth, with the economy actually contracting by 1% in the first quarter as domestic demand fell. Last year’s elimination of several subsidies, most significantly for petrol and natural gas, has affected Ecuador's working and urban classes by increasing the price of food staples, public transport and basic utilities, while up to 140,000 public sector jobs are expected to be cut to reduce spending. The government is hopeful that medium and large-scale mining will become a catalyst for growth, but the success of environmental and anti-mining groups in the March elections underlines the extent of local resistance to foreign mining activity. There is serious concern in Quito about the discovery in Colombia of TR4, a soil-based fungus which attacks banana plants. Ecuador is the world's largest banana exporter, with exports worth 3.2 billion dollars in 2018. The industry provides livelihoods for more than 15% of the country’s labour force, with 2.5 million people working for about 16,000 banana producers in the country, many of them small businesses. The government cannot afford another drag on the stuttering economy, and in August it tightened bio-security protocols and announced 18 million dollars of extra funding for efforts to ward off the fungus.
The conditions attached to the IMF loan arrangement should improve conditions for international investors, and the level of expropriation risk has fallen since the Correa years. However, the likelihood that social and political opposition will succeed in derailing new mining projects remains a real concern. The government has responded by stepping up its efforts to promote the benefits of modern industrial mining while at the same time pressuring the Constitutional Court to limit the popular consultations needed before a project is approved. But it will be hard for Quito to counter the current strength of anti-mining activism, especially in the southern highlands where rural and urban communities have both allied with local politicians to resist mining because of its impact on water supplies as well as fragile ecosystems.
TREND ► OUTLOOK ▲
Mining is becoming a major source of political tension as the government increases efforts to attract international investment and anti-mining activists gain strength from resisting the development of medium and large-scale mines. While the related risk of political violence is highest in the southern highlands, it will be evident elsewhere as the government seeks to open up more areas for mining. Meanwhile, clashes between supporters of Moreno and Correa will continue, and tensions will increase as the Moreno administration pushes ahead with efforts to bring Correa back to Ecuador to stand trial. Another source of disquiet has been the extent of Venezuelan immigration, and Quito has now tightened restrictions on Venezuelans attempting to cross the border. More than half a million Venezuelans are thought to have entered Ecuador in the first eight months of 2019, many through Colombia, with some 85,000 arriving in August in a rush to beat new visa requirements.
The Ecuador-Colombia border is seeing territorial struggles as transnational drug cartels fight for control over distribution networks for illicit drugs, especially cocaine, that are produced in Colombia and then shipped to lucrative overseas markets via Ecuador. The task of containing the crisis is being complicated by Moreno’s restructuring of internal security agencies after the Correa years, the reduction of public spending, and the escalation of drug-related violence in Colombia.
TREND ► OUTLOOK ▼
The Moreno government remains committed to dollarisation and the IMF agreement is designed to provide additional support for it while also easing the balance of payments situation. The government is exploring new bilateral trade deals as well as bidding for full membership of the Pacific Alliance, the trade group for Latin American countries that border the Pacific. Correa had refused to consider membership but Moreno is keen to join. Following discussions at the Pacific Alliance summit in July, it is possible that Ecuador could become a full member by the end of 2019.
Turning to the IMF has reduced the fiscal pressure on the Moreno government, and the conditions attached to the loan should ultimately make it easier for the country to borrow. However, public debt has continued to grow despite the change from Correa to Moreno. Over the last five years, the total stock of overseas public debt has increased from 17% to 36% of GDP, with the country’s overall debt now at 46%. While the longer-term trajectory is positive, efforts to reduce the budget deficit have also stalled, with public spending up again during the first half of 2019 and the deficit widening year-on-year. On the positive side, oil production has increased as prices have firmed.
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