Previous Quarterly Editions
Expropriation Risk: 60 58 56 53 Political Violence Risk: 68 70 72 69 Terrorism Risk: 50 48 52 54 Exchange Transfer and Trade Sanction Risk: 50 48 46 45 Sovereign Default Risk: 72 72 70 70
TREND ▼ OUTLOOK ▲
Having spent the first year of his presidency dealing with an intense political crisis as his predecessor split the governing party, Lenin Moreno has now begun to formulate his economic programme. In April, the president announced a series of economic and fiscal reforms to boost economic growth and stabilise the public finances. State-owned enterprises will be restructured, sold or eliminated, including firms dedicated to the production of cement and pharmaceuticals, while several government ministries will be amalgamated or dissolved. The aim is to reduce total government spending by one billion dollars annually between 2018 and 2021. Creating a credible programme of fiscal consolidation is particularly important now that the government has become reliant on the international bond markets to an extent that is concerning international investors.
Reducing the budget deficit and streamlining state institutions should also encourage local and foreign direct investment. Moreno has pledged to reduce the fiscal deficit from 5.6% in 2018 to 2.4% in 2021, setting a realistic target based on gradual deduction rather than a promise to balance the books while in office. As part of this programme, in August the National Assembly passed a new law which creates numerous new incentives for private enterprises, including tax breaks on productive investments and reductions in mining royalties. Overall, Moreno is trying to rebalance the relationship between the public and private sector by reducing the state’s direct role in the economy. He will be helped by the fact that the political landscape has become clearer now that former president Rafael Correa has established his breakaway party. This leaves Moreno fully in charge of the leftist ruling party, Alianza Pais. Moreover, ongoing investigations into Correa, some of which concern the alleged kidnap of a political opponent in Bogota in 2012, have led to an outstanding arrest warrant.
This has complicated his efforts to build an effective opposition party even as he claims that Moreno is using the judiciary for ‘revenge.’ He remains in Belgium, where he has lived with his family since leaving office. Tensions between supporters of the current and former president will intensify in the build up to the local elections due in March, by which time the impact of lower fuel subsidies and hence higher retail prices will become apparent.
TREND ▼ OUTLOOK ►
The recent economic reform package reinforces the Moreno administration’s commitment to create a conducive environment for domestic and overseas investment. It has focused particularly on the oil sector, pushing through new production-sharing agreements in July that are designed to attract greater private investment. Subsequent legislation introduced in August commits the government to enter into international arbitration in the case of commercial and investment disputes, giving investors greater confidence in the business environment. While reductions in mining royalties will encourage mining firms to consider additional projects, social opposition to medium and large-scale mining remains intense and the constitutional and legal framework provides mining activists with tools to block mining projects. In July, following a long campaign by local communities and social movements, a local court demanded the cessation of activities at the Rio Blanco mine in the southern province of Azuay.
While the political climate has stabilised in recent months, tensions remain high and will increase as the government reduces public spending and 2019's local elections approach. The need for new parties to register with the electoral authorities is a potential point of friction with Correa’s supporters, who are likely to accuse the government of preventing their candidates from standing. If Correa continues to accuse Moreno of political persecution, the political climate is likely to become increasingly toxic and may provoke significant political protests. The political situation in Esmeraldas and other provinces will remain volatile as cross-border drug activity continues to cause tensions as it moves across the border from Colombia. The government will have to balance its desire for public spending cuts against the need for greater security in the region.
TREND ► OUTLOOK ▲
Conditions on the Ecuador-Colombia border remain tense. With Ivan Duque taking office in Colombia on a platform that includes a tough approach to the peace deal reached with former guerrillas, there may be an increase in the spill-over of former members of the FARC and related drug activity into Ecuador. Moreno met Duque at his inauguration in August to discuss security along the border, but this is unlikely to be a priority for the new Colombian president. The task of containing the crisis is being complicated by a restructuring of internal security agencies. Earlier this year, Moreno announced the closure of the National Intelligence Secretariat, established under Correa, following claims that it had been used to monitor the political opposition.
Higher world oil prices and a surge in remittances from Ecuadorian migrants have helped the balance of payments, and the temporary import duties that the government announced in April will provide additional support and raise fresh government revenues. The Moreno government remains firmly committed to dollarization and is exploring the possibility of new bilateral trade deals.
Even if the fiscal consolidation programme that Moreno announced in April gains traction, the budget deficit will remain a significant concern in the short term, while domestic and overseas public debt will continue to grow. Moreover, reducing the deficit at the same time as implementing the fiscal consolidation programme will prove difficult. The Moreno government is likely to return to international bond markets in the coming months as it continues to plug immediate holes in the public finances. It will also continue to search for alternative sources of overseas funding, including international development agencies. In recent months, loans have come from the Inter-American Development bank to fund investment projects, including the new metro in Quito, which remains under construction.
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