Opinions

Moreno surprises international markets but will his reforms revive Ecuador’s economy?

By William Bonds

In April 2016, to the dismay of international markets, Ecuador elected socialist Lenin Moreno, Rafael Correa’s heir and former vice-president, as the country’s new head of state.

Global markets were hoping for a surprise win from Guillermo Lasso, a former banker, which the international community was confident would put Ecuador on a path towards further market liberalization, in a sense following in the footsteps of Mauricio Macri in Argentina and Michael Temer in Brazil.

The 64-year-old socialist’s victory was seen as potentially ushering in a continuation of Correa’s populist tendencies and anti-market rhetoric; it comes at a time when many investors feel Ecuador needs to commit to opening its economy up.

Ecuador was hit particularly hard by the drop in oil prices three years ago, but the economy has rebounded somewhat and seems to be trending slowly towards recovery. This month the World Bank upgraded its growth estimate for the oil producing nation. In January, the organization projected Ecuador’s economy would shrink around 2.9% this year, but by June it revised this projection sharply upward to growth of 1.3%. Last week, the government reported strong 2.6% growth during the first quarter of 2017.

Guayaquil would benefit from increased trade.

According to a report by Capital Economics, this expansion was mostly due to the reconstruction efforts after the big 2016 earthquake, and loose fiscal policy ahead of the presidential election. The firm believe the strong recovery is unlikely to last, pointing to a large fiscal “squeeze” needed in order to keep the current account deficit in check, which is sure to put a damper on growth.

Adam Collins, a Latin American economist at Capital Economics, believes that squeeze is more or less unavoidable.

Moreno’s electoral triumph did not and will not have a significant impact on Ecuador’s economy, with markets largely pricing in his victory. But questions remain about whether the country’s new leader will be able to shift the country’s markets in the right direction.

It’s important to point out that Moreno hasn’t inherited the same country Correa did; oil prices aren’t anywhere close to $100 per barrel, and the country has amassed much more foreign currency debt in recent years.

Even though Capital Economics expects a broadly loose fiscal spending to continue, Moreno has tried to differentiate himself from Correa, who was well known for regular confrontations with the private sectors and business groups. Among Moreno’s first acts as president was to announce a major austerity plan.

Also unlike his predecessor, Moreno seems keen on striking an alliance with private sector business leaders. Earlier this month, he announced the creation of a cross-sector committee tasked with identifying the biggest productivity issues in the country and enacting recommendations on how to tackle them. Both public actors and business groups are represented in this delegation.

Business and exporters have long stressed the need of a more diversified economy, which will require the support of the government, especially if they want Ecuador to become competitive enough to attract foreign investors, something Moreno seems keenly aware of.

The idea of replacing the U.S. dollar as the national functional currency and with the Sucre (Ecuador’s long-abandoned currency), a very popular measure with some of the more radical members of Moreno’s party, has also been scrapped.

Foreign Currency Debt: The Elephant in the Room

Of the most urgent matters Moreno will need to tackle is, without a doubt, the country’s debt levels, which this year is set to be hit $41.8 billion, or 41.57% of Ecuador’s GDP.

In early July, Standard and Poor’s downgraded the credit rating of Ecuador from ‘B’ to ‘B-‘, citing that the high levels of debt along with weak institutions and restrictive monetary policy are leaving the newly elected government with few options.

Ecuador is considered a serial defaulter by many, having failed to honor its payments on several occasions, most recently in 2007, part of the reason why markets are having tough time trusting Moreno despite his modest investor-friendly assurances; bond yields have barely moved since the new leader took the helm, a worrying sign.

He will seek to refinance short-term debt and reduce interest rates, with a view towards alleviating the financial burden of the country and stimulating spending. Most of the country’s debt tends to be short-tenor, and it had to offer high-interest rates to attract investors; at the same time, it still maintains important outstanding obligations with China, its main financial partner.

“We will explore every opportunity to refinance our debt,” Moreno told the local press. “Our average debt is not necessarily expensive,” but some tranches were acquired during stressed times for the country, which was hit by low oil prices and a rising US dollar, Moreno added.

He has already approached both China’s President Xi Jinping and the World Bank with the intention of striking a deal.

Even if Ecuador’s short-term economic outlook is mixed, it is inevitable that in a world volatile oil prices, Lenin Moreno will need to attract foreign investors to his shores if he wants to guarantee the economic stability of the country – and more importantly, compete with the country’s Southern and Central American peers, many of which have made large strides towards fiscal discipline and market openness.

That said, Moreno’s task is not insignificant. He will need to rein in spending, tighten the fiscal deficit and most importantly, work hand in hand the productive sectors in Ecuador. His brief presence in office thus far suggests a willing disposition to address some of these problems, but the real test will come when more difficult decisions need to be made.
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Credit: Bonds & Loans, www.bondsloans.com

  • Jason Faulkner

    Thank goodness we didn’t follow in the footsteps of Mauricio Macri in Argentina and Michael Temer in Brazil. The massive daily protests tells you everything you need to know about how their policies are affecting the people. The brutal government repression of those protests tells you everything you need to know about how right-wing governments think about regular people. Neoliberalism ALWAYS relies on repression to be implemented. ALWAYS.

    Incidentally, notice that nowhere in this long economic analysis does it mention the people’s standard of living, poverty, health, nutrition or wellbeing. That’s the whole point of an economy in the first place. Being good for international markets (aka, the idle money classes in other countries) does not correlate with being good for people.

    Regardless, I wouldn’t put much credence in these seemingly technical analyses. The IMF revised their original 2017 projection by over 300%. In 2016 they only had to revise their original projection by 200%, but even with the earthquake the projection was way off. No matter how hard capitalists try to sell their ideology as science, Ecuador continually outperforms their dire predictions.

    • Michael Berger

      There have also been massive protests here and brutal government repression also as anyone who has lived here should be well aware. Moreno is releasing some protesters who were illegally detained and jailed while defending their property from government goons. I’m not sure which Ecuador you are living in but the one I live in is not outperforming anything other than possibly other cultures where a two hour lunch is the norm.

      • Jason Faulkner

        What massive protests and brutal oppression has there been here? Please be specific with dates and locations.

        • StillWatching

          How about Venezuela, which you always defend?

    • StillWatching

      “Thank goodness we didn’t follow in the footsteps of Mauricio Macri in
      Argentina and Michael Temer in Brazil. The massive daily protests tells
      you everything you need to know about how their policies are affecting
      the people.”

      Yet faulkner defends everything that Maduro does in Venezuela. What a hypocrite.

      “Incidentally, notice that nowhere in this long economic analysis does it mention the people’s standard of living, poverty, health, nutrition or wellbeing.”

      How’s that working out in Venezuela, faulkner?

  • StilllWatching

    “Of the most urgent matters Moreno will need to tackle is, without a doubt, the country’s debt levels, which this year is set to be hit $41.8 billion, or 41.57% of Ecuador’s GDP.”

    This can’t possibly be right. Just last week faulkner authoritatively told us that Ecuador’s Debt/GDP ratio was 29%. This writer better check his sources ‘cuz I’m goin’ with faulkner.

    Well, probably not…

  • Michael Berger

    Good article but a couple corrections are needed:
    1. There is nothing radical about a country using its own currency.
    2. China is not Ecuador’s main financial partner it is its financial master.

    • Globetrotter

      I agree. Possession is, de facto, “nine-tenths of the law”. Lenders are rarely in control, at least not happily.

      China cannot foreclose, repossess Ecuadorian highways, schools, hospitals and power plants, and haul them to Beijing. So those who decry their loans are spouting nonsense. Admittedly, it would have been smarter for China, business & cost wise, to set up bribed puppet dictators, assassinate any opposition and then rape the locals and the landscape for huge exported profits.

    • Jason Faulkner

      China owns less than a third of Ecuador’s debt. How does that make them Ecuador’s master?

      • Michael Berger

        China is smart enough to have taken measures to ensure they won’t be defaulted on. They have their hooks in deep and a ton of influence here. Getting a loan from China is no joke, they are not just going to write it off. That is why Correa went from trying to preserve Yasuni to trying to exploit it; China needs the oil. China essentially owns Ecuador.

        • Jason Faulkner

          How many countries has China invaded over debt? How many governments have they overthrown?

          Correa went from trying to preserve Yasuni to exploiting it because the international community didn’t come up with even 1% of the value. You really have no idea what is happening in this country. Do you even live here?

          Your rhetoric is refuted by reality. I’m not sure how you’re supposed to reconcile that reality.

  • Kevin Lichtman

    To Sucre or not to Sucre…that is the question. The dollar has been good to Ecuador. It slays inflation, it boosts purchasing and borrowing power and takes fiscal temptation off the table. Returning to the Sucre would cause instant devaluation, a potential boon for exports of non-petroleum or natural resource products, but makes consumer and capital imports more expensive. More importantly, it would pose fiscal temptation and inflation risks in the hands of an irresponsible government. For U.S. expat retirees on fixed dollar incomes, it would be delightful, however.

  • Doug Vasey

    Opening up the country to unbridled capitalism is dangerous. Capitalists only care about profits, not people. Business people who risk their money deserve to do well. However, capitalism must be controlled to protect the less ambitious people of the world.