Previous Quarterly Editions
Expropriation Risk: 53 53 49 53 Political Violence Risk: 71 72 72 78 Terrorism Risk: 54 55 56 56 Exchange Transfer and Trade Sanction Risk: 45 43 43 43 Sovereign Default Risk: 68 65 63 65
TREND ▲ OUTLOOK ▲
The waves of protests that swept across Ecuador in October threatened to topple President Lenin Moreno and plunge the country into a deep political crisis. The protests were triggered by the removal of fuel subsidies. There had already been modest reductions in 2018, and the move was part of a longer-term process of fiscal consolidation which accelerated after the Moreno government agreed a loan worth 4.2 billion dollars with the IMF early in 2019. Various sectors mobilised against the withdrawal of the remaining fuel subsidy, with a national transport strike bringing Ecuador to a standstill even before students, trade unions and indigenous movements organised a series of protests across the country. The biggest turnouts were in Quito, the capital, where the police and military were deployed to break up protests. However, there were attacks on government buildings, including the National Assembly and the national audit office, which has become identified with IMF-related austerity. Some shops and businesses were also damaged. Businesses were affected elsewhere in the country, especially those connected with agriculture in the highland region. With the protests spiralling out of control, Moreno moved the seat of government to Guayaquil, the country’s second city, and increased the military presence in Quito. But after nearly two weeks of disturbances throughout the country, Moreno backed down, restated the fuel subsidies and entered into negotiations with the protesters. The protests left at least nine people dead and over 1,500 injured, making them the most violent disturbances Ecuador has experienced in recent decades. While Moreno remains in office, his position has become even more perilous and the use of the military against protesters has damaged his standing even among his own supporters. During 2020 he faces the unenviable task of trying to push forward with budget cuts and economic liberal reforms while facing an activated civil society and weak economic growth. Having to restore the petrol subsidies is a major challenge because their elimination was meant to save 1.5 billion dollars. In terms of income, the government will become even more reliant on oil revenue as hopes of an expansion in the mining sector are dampened by the increasing strength of environmental and indigenous opposition. At the same time, demands for public spending are increasing, not only to strengthen the security forces but to improve prison conditions. The October protests were accompanied by many instances of looting and vandalism, allowing Moreno’s critics on the right to accuse him of being soft on law and order, but they were also mirrored inside the prison system and showed the risks associated with overcrowding. These tasks will be complicated by the weakness of the political party he nominally leads, Alianza Pais, and the strength of opposition from the former president, Rafael Correa, and his supporters. While Correa is effectively living in exile in Belgium and facing several corruption charges, he maintains significant support within Ecuador. Given this outlook, there is no guarantee that Moreno will remain in office until the next presidential election, which is due in February 2021.
The conditions attached to the IMF loan arrangement should improve the environment for international investors, and the level of expropriation risk has fallen since the Correa years. However, the recent protests show the difficulties that the Moreno government will face in trying to implement policies that are part of the IMF loan agreement. The IMF has once again become the focus of attention for opponents of economic liberal policies, and Moreno’s opponents on the political left will be working hard to exploit this in the coming months. While the Moreno government will continue to support the mining sector, anti-mining activists are already drawing strength from the ability of the October protests to get fuel subsidies reinstated. Their resistance to new mining projects during 2020 will be buoyed by the evidence that protests can force a change in policy.
Further protests and disturbances are likely as the Moreno government attempts to move forward with the economic reforms that are needed to ensure continued access to loans from the IMF and other multilateral organisations. The political climate will remain volatile as Moreno’s opponents will seek to capitalise on the strength of opposition to these economic policies. Correa and his supporters, in particular, will step up their efforts to undermine not only Moreno but also Alianza Pais, which Correa led before breaking away from it. Indigenous movements, trade unions, and student organisations will also mobilise to block economic reforms, budget cuts, and mining projects. Businesses and investments are likely to be affected by the resulting disruption, especially in the highland region.
The government pointed to the involvement of criminal networks in the recent protests which, combined with recent violent disturbances in prisons, suggest criminal activity is spreading. The networks are linked to important changes in the drug trade in recent years as transnational drug cartels fight for control over distribution routes 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 the reduction in public spending and the escalation of drug-related violence in Colombia.
TREND ► OUTLOOK ▲
While the government will face difficulties implementing policies associated with the IMF agreement, it will remain firmly committed to dollarisation. It is exploring new bilateral trade deals as well as bidding for full membership of the Pacific Alliance, the trade group for those 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 in 2020. Even Moreno’s political opponents are unlikely to challenge dollarisation unless there is a full-blown economic crisis in the coming years.
While access to credit from the IMF and other multilateral organisations has eased the immediate fiscal pressure on the Moreno government, the recent protests illustrate the difficulties it faces in reducing and maintaining public spending cuts. Moreover, the political turmoil is likely to increase the cost of borrowing on international financial markets, adding to the already escalating cost of debt servicing.
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