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Ecuador signals that it’s open for business

By Stratfor Worldview staff

Ecuador is open for business.

Since coming to power in May 2017, President Lenin Moreno has set about addressing the country’s financial problems with economic and political reforms to better promote trade and investment. At the same time, he has tried to reduce the influence of his predecessor in Ecuadorian politics in an effort to preserve his policies. Voters blocked former President Rafael Correa’s path back to power in February by reinstating term limits in a referendum. And without a clear successor to take up Correa’s torch, his more left-leaning faction of the ruling Alianza Pais coalition may find itself on the sidelines after the 2021 presidential and parliamentary elections. That means the business-friendly regulatory changes Moreno is pushing for — such as tax reductions and measures to lower the risk of expropriation — will last into the next government.

Setting an Agenda
President Lenin Moreno

Moreno came to office at a difficult time for Ecuador. The collapse of global oil prices in 2014 had exposed the country’s crippling economic dependence on oil exports and drove the government’s budget deficit up to 3.3 percent of gross domestic product — nearly a 0.5 percentage point change year to year. Ecuador’s trade deficit, in turn, jumped from $1.7 billion in 2014 to $3 billion the next year. To cover the shortfall, the Moreno administration alleges, Correa’s government took on far more debt than it reported. The resulting financial problems — a recurring issue for Ecuador — became the first priority for the incoming Moreno administration.

Former president Rafael Correa

Compared with that of his predecessor, Moreno’s agenda is more favorable to foreign investors. Correa’s government — though amenable to outside investment — often ventured into resource nationalism and abrupt regulatory changes. In 2010, for example, his administration forced foreign oil companies to renegotiate their contracts under the threat of expropriation. It also raised taxes on individuals and corporations to fund higher levels of social spending. While Moreno isn’t planning to roll back all of these measures, he intends to create a more agreeable climate for investors.

Moreno’s Three-Part Strategy

His strategy for achieving that objective is threefold. First, the government is trying to expand Ecuador’s economy beyond the oil sector and to bolster its investment ties to the outside world. Because it uses the U.S. dollar, Ecuador can’t simply devalue its currency to boost non-oil exports and to attract foreign investment. The dollar’s growing strength, moreover, will make Ecuadorian exports less attractive to neighboring countries such as Brazil and Colombia, whose currencies are weakening. So instead, the Moreno government intends to open free trade negotiations with the United States, Mexico and South Korea while also cutting red tape for businesses and investors, for instance with legislation to eliminate a 5 percent surcharge on currency moving out of the country for new investments.

Second, Moreno’s government will try to smooth its rocky relations with the United States, mainly by eschewing the kinds of ideologically motivated policies that Correa put in place. To that end, Moreno’s government has reduced its public support for Venezuelan President Nicolas Maduro and even called for a referendum in the tumultuous country to validate the results of Venezuela’s May 20 election.

Finally, the current administration will strive to keep Correa and his allies from interfering with its pro-business policies. The referendum on term limits was the first step in that direction. It also empowered Moreno to reorganize the Citizen Participation Council, a body Correa’s government created in 2008 to oversee government spending and the actions of the judiciary. After the election of new, more sympathetic council members, Moreno will probably be able to pass legislation and issue presidential decrees with fewer legal challenges. In the meantime, his administration is moving to block Correa from public life in Ecuador. The attorney general’s office recently recommended bringing criminal charges against the former president for allegedly ordering the kidnapping attempt in 2012 of a former Ecuadorian lawmaker living in Colombia. If the charges stick, Correa will have a hard time making a run for another public office, such as a seat in parliament, or even returning to Ecuador from Belgium, where he lives.

A Brighter Future for Business

Having effectively shut Correa out of politics, Moreno will have few obstacles to negotiate as he forges ahead with his agenda. His administration will try not only to implement domestic economic reforms over the next four years but also to press for more free trade agreements. It will also consider joining the Pacific Alliance regional trade bloc. Some of these deals may fall through, since agreements with major food exporters such as the United States and Mexico could hurt Ecuador’s own sensitive agriculture sector and would rally public opposition. In parliament, however, most of Moreno’s measures will probably pass with little resistance, and he has virtually no opponents popular enough to threaten his re-election in 2021. Even if Correa manages to return to the country to contest a legislative seat, he will lack the political influence and power to jeopardize Moreno’s policies.

Together, these factors suggest smoother sailing for investors and businesses in Ecuador. The political risk to investors in the country will remain low so long as Correa is out of the picture. Moreno, meanwhile, will keep working to cut red tape and expand trade ties and attract more money into Ecuador.
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Credit: Stratfor World View, https://worldview.stratfor.com