Previous Quarterly Editions
Expropriation Risk: 58 56 53 53 Political Violence Risk: 70 72 69 71 Terrorism Risk: 48 52 54 54 Exchange Transfer and Trade Sanction Risk: 48 46 45 45 Sovereign Default Risk: 72 70 70 68
TREND ▲ OUTLOOK ►
The political turmoil that has marked Lenin Moreno’s presidency shows no sign of abating. He began 2019 with his third vice-president in twenty months after his second was accused of accepting payments in exchange for political appointments and was forced from office in December. Seeking to avoid the risk of appointing another tainted politician, he has chosen Otto Sonnenholzner, a youthful radio presenter and businessman from the coastal city of Guayaquil, who has no political experience or affiliation. It was notable that the ruling party, Alianza Pais, did not protest at his appointment, although others in the legislature complained that having someone with so little experience a step away from the presidency makes a mockery of Ecuadorian politics. Despite this restraint, the choice of Sonnenholzner deepens a rift between Moreno and the Alianza Pais that had been developing during 2018 as education minister Fander Falconi and other leading members of the party chose to leave the government in protest at public spending cuts. President Moreno also entered 2019 with a new cabinet, having asked the members of his previous cabinet to resign in November. The reshuffle brought in more Moreno loyalists and is connected to wider political and bureaucratic changes that Moreno is making to reduce the size of the state and cut public spending. Several government ministries have been merged or eliminated, and there are ongoing efforts to lower the wages of politicians, bureaucrats and public sector workers. Although the 2019 budget makes only moderate reductions in public spending this year, the political struggle these have generated indicates the difficulties Moreno faces in seeing through his ambitious programme of fiscal consolidation. Students and academics have protested against planned cuts in public spending on higher education, forcing the government to adjust its forecasted spending upward, while transport unions mobilised against a further reduction in fuel subsidies. They ultimately forced the government to set aside funds to compensate drivers for higher fuel costs, thereby limiting the impact of the subsidy reduction on public spending. The National Assembly then sent back the executive’s original budget proposal, seeking greater clarity and assurances on several issues. Still, Moreno’s efforts have been well received by international investors and financial institutions. The Venezuelan migration crisis has become another big challenge for Moreno as the number of Venezuelans living in Ecuador continues to grow. Estimates suggest that a further 1.3 million arrived during 2018, and in January the government indicated it will take a stricter approach to requiring documentation at the border. While a tougher line on Venezuelans will further alienate Moreno from his socialist roots, it should increase his popularity with the right. In the same vein, in a further high-profile break with the foreign policy of his predecessor and former party colleague, Rafael Correa, he has joined other Latin American governments in supporting opposition to the Maduro government.
TREND ► OUTLOOK ▼
Moreno has continued to court overseas investors and improve business conditions in Ecuador after the Correa era. The appointment of Richard Martinez, former head of the country’s main business organisation, as Minister of Finance in 2018 is a major part of this shift of emphasis. The government has also been strengthening its relations with the IMF and other international institutions. Despite these pro-business moves, there remains considerable opposition to large-scale mining in Ecuador, particularly in areas with large indigenous populations, and Moreno’s options here are limited. Indeed, his efforts to make the Constitutional Court more independent may make it easier for anti-mining activists to use several clauses in the constitution to challenge mining projects on environmental grounds.
TREND ▲ OUTLOOK ▲
Political tensions will build with the approach of the local elections on March 24, when voters across the country elect a full slate of local officials. Efforts to register a new political party to represent Correa and his supporters in time to participate have failed, and this has left a significant number of voters effectively locked out of the electoral system. It is not clear how far they will go to protest the absence of a Correa option. Correa himself is in political exile in Belgium with his family and has recently requested political asylum there, as he is wanted in Ecuador on kidnapping charges. The political situation in Esmeraldas and provinces in the northern Amazonian region will remain volatile as drug cartels continue to struggle for control of the region.
Transnational drug cartels are fighting to control the flow of illicit drugs, especially cocaine, across the Ecuador-Colombia border. Links between the Ecuadorian army and drug cartels have recently been revealed, and the death of ‘Gaucho’, the leader of a drug cartel with links to the FARC, the disbanded Colombian guerrilla movement, is unlikely to reduce violence in the region. The task of containing the crisis is being complicated by a restructuring of internal security agencies as Moreno closes the National Intelligence Secretariat, established under Correa, following claims it had been used to monitor the political opposition.
TREND ► OUTLOOK ►
The decline of global oil prices at the end of 2018 has placed pressure on the balance of payments, while the increasing cost of servicing the country’s overseas debt has added further strain. However, the Moreno government is committed to free trade and is exploring the possibility of new bilateral trade deals. It has also expressed interest in becoming a member of the Pacific Alliance, the trade group for Latin American countries bordering the Pacific, further signalling its commitment to lowering trade barriers. The government remains firmly committed to dollarization.
TREND ▼ OUTLOOK ►
The Moreno government made progress in reducing the budget deficit during 2018, and it should be significantly below the 3.3% of GDP recorded in 2017. Overseas public debt has risen from 17% to 32% of GDP since 2013, and it will continue to increase in the medium-term as the government finances its deficit through overseas debt. This will come from a variety of sources that may possibly include an IMF loan.
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