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Expropriation Risk: 60 60 60 57 Political Violence Risk: 57 57 57 57 Terrorism Risk: 58 58 58 58 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 57 57 57 47
TREND ▼
Guillermo Lasso won the second round of the presidential elections on April 11, 2021, with 52% of the vote. The right-wing businessman, who was running for the presidency for the third time, narrowly defeated Andres Arauz, the leftist candidate who is closely allied with the former President, Rafael Correa. Lasso is scheduled to start his four-year term in May 2021. His victory signals broad policy continuity as the outgoing President, Lenin Moreno, governed in alliance with the right and introduced a series of austerity measures and liberal economic reforms, which Lasso will attempt to extend.
However, Lasso’s victory is marred by claims of fraud in the first-round of the presidential elections. The President-elect won 19.7% of the vote in the first round of the elections in February 2021, marginally ahead of the third-placed indigenous leftist candidate Yaku Perez, who won 19.4%. Both candidates trailed well behind Arauz who secured 33% of the total vote. Perez and his party Pachakutik claimed the elections were rigged to enable Lasso to pass into the second-round, providing numerous examples of alleged electoral fraud.
In face of these allegations, Lasso agreed to a partial recount of the vote. However, he quickly backed out of this agreement and the electoral authorities ultimately confirmed his place in the second round. Perez and Pachakutik continued to contest the results and urged their supporters to vote null in the second round to protest Lasso’s advancement and reject Arauz’s candidacy.
Perez’s decision not to support Arauz was rooted in Correa’s treatment of indigenous leaders and movements during his decade-long presidency (2007-17). Perez and other indigenous leaders feared a victory for Arauz would signal a return for Correa, who has been in self-imposed exile in Belgium since leaving office and faces corruption charges in Ecuador. Null and blank votes accounted for 18% of total votes in the second round, suggesting many of Perez’s supporters followed his demands. The null votes set a limit on the number of new voters Arauz could attract in the second round and helped Lasso win.
Lasso was therefore not backed enthusiastically in the polls and this could undermine his presidency. He will also face a largely hostile National Assembly, which will be dominated by left and centre-left parties and alliances. Followers of Arauz and Correa will have 49 of 137 seats in the chamber, while Pachakutik and Democratic Left will have 27 and 18 seats, respectively. CREO, the party Lasso leads, won only 12 seats. The Social Christian Party, the right-wing party that supported his candidacy, will have 18 seats.
The composition of the legislature will put a brake on Lasso’s reform agenda, which will centre on reducing regulations, lowering taxes and attracting overseas investors. Strong opposition from social movements will also limit his policy space. Lasso will therefore face numerous obstacles in his efforts to strengthen the economy, which has been devastated by the effects of COVID-19.
The pandemic has deteriorated in recent months and Ecuador’s vaccination programme has been slow; only 5% of the population had received at least one dose of a COVID-19 vaccine by early May 2021 and new variants of the virus had been detected, making the pandemic even more difficult to contain. The health system has been unable to cope with the surge in new cases.
The outlook for Lasso’s first six months in office is not encouraging, even if the economy is expected to recover slowly this year, supported by rising oil prices.
Lasso’s election victory has buoyed international investors and further reduced the risk of expropriation. He will attempt to continue the austerity and liberal economic reforms that the outgoing President Moreno implemented after abandoning Correa’s state-centric economic nationalism. Lasso has committed to honour the agreement that the Moreno government reached with the International Monetary Fund (IMF) to access a USD6.5bn loan in August 2020. He will strengthen relations with the IMF and World Bank and with international investors.
The greatest risk to investment is in the mining sector, due to strong environmental and anti-mining movements. Evidence of this came in February 2021, when voters in the southern highland city Cuenca enthusiastically voted to restrict mining in the region.
TREND ►
Arauz quickly accepted the results of the second round of the elections, lowering the possibility of large-scale political unrest in the near-term. Yet, Lasso will face strong opposition in the National Assembly to his reform agenda, while his commitment to follow through with the agreement reached with the IMF is likely to provoke more protests.
Limited public funds and weak economic conditions will limit Lasso’s capacity to reduce opposition to his reforms. He will also face pressure from cash-strapped local governments and government agencies. The expansion of criminal networks in Ecuador will increase the risk of violence and disorder.
Criminal networks connected to international drug trafficking expanded in Ecuador during Moreno’s presidency. Conditions in the country’s overcrowded prisons have deteriorated because of spending cuts and COVID-19. In late February 2021, riots broke out in several prisons, leaving 79 prisoners dead and hundreds of prisoners and staff injured. The disturbances were followed by revenge killings by rival gangs in the coastal region. Rising poverty will support efforts to recruit new members into criminal networks, which are fighting to control lucrative drug trafficking routes to the United States and Europe.
Lasso is a staunch defender of dollarisation and will support measures to retain the monetary policy, which has been in place since 2000. A law explicitly aimed at protecting dollarisation and the autonomy of the central bank was approved by the National Assembly in late April 2021. Lasso will push ahead with Ecuador’s integration into the Pacific Alliance and seek to strengthen trade relations with the United States and other key trading partners.
The USD6.5bn loan which the Moreno government secured from the IMF in August 2020 paved the way for a comprehensive debt restructuring agreement with bondholders. Lasso’s election will reassure investors and open new credit lines with international investors and multi-lateral organisations.
Higher oil prices will also provide some relief for the economy and increase the government’s capacity to service its overseas debt. However, public debt has increased substantially over the last five years and servicing this debt will be challenging given the costs associated with COVID-19 and the dramatic economic downturn.
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