Ecuador oil

Ecuador’s new president, Lenín Moreno, is turning the page on his predecessor, and championing private sector investment. But with both Congress and his party divided, Mr Moreno needs to win 2018’s referendum before he can push ahead with reforms. Jacopo Dettoni reports. 

In a surprising turn of events, Ecuador’s new president, Lenín Moreno, broke with his predecessor and mentor Rafael Correa immediately after gaining power in a hard-fought election campaign early in 2017. With crude prices far off their peak, the oil-rich Latin American economy is in dire straits, Mr Moreno admitted, publicly denouncing the mismanagement and corruption of Mr Correa’s eight years of the so-called Citizens' Revolution, when he himself was a vice-president.

He did not hesitate to sideline vice-president Jorge Glas (Mr Correa’s long-time right-hand man), who was accused of corruption in the regional graft scandal orchestrated by Brazilian construction company Odebrecht. Mr Glas is now in jail, pending process. On the other hand, Mr Moreno has been conciliatory towards groups that his predecessor scorned for years, including the business community, which has cautiously bought into his promise to make private investment the engine of economic growth.

While Mr Correa retains great political influence within the ruling Pais Alliance party, Mr Moreno enjoys sky-high approval ratings across the country and wants to capitalise on this with a popular referendum that would prevent his predecessor from running again for president in 2021 – thus relegating him to the margins of national politics. Only then will the president’s reform agenda have a clear way ahead.

A gap to fill

After years of significant public spending and investment in Ecuador, the new government is betting on private investment to sustain economic growth during the seemingly inevitable years of fiscal austerity that lie ahead. “If we stop public investment altogether the whole economy will collapse,” says economy and finance minister Carlos de la Torre. “We have to withdraw gradually, and make sure that private investment fills the void.”

Mr Correa, who was elected in 2006, gave Ecuador much-needed stability in the wake of a disastrous decade that saw the rise and fall of nine different presidents. His Citizens' Revolution comprised assertive social and infrastructure programmes that shored up economic growth, which averaged 4.3% between 2006 and 2014 – boosted by booming oil exports – and cut the poverty rate from 37.6% in 2007 to 22.5% in 2014, according to World Bank figures.  

However, growing fiscal imbalances were an underlying story of the Citizens’ Revolution. These came to light in 2014 when the commodity boom ended, and were exacerbated by Ecuador’s worst earthquake in history, which hit its western regions in April 2016. The fiscal deficit peaked at 5.7% of GDP in 2016, and total public debt reached about 43% of GDP at the end of September 2017, according to government figures. Reducing the former down to a targeted 1% of GDP by 2020 will depend heavily on deep cuts in public investment.

Moreno's PPP plan

Public investment accounts for about 15% of GDP in Ecuador, and the government plans to reduce this to 10% of GDP by 2020. Several measures are in the pipeline to enable private investment to compensate for falling public investment. “We are working with multilateral institutions to establish a public-private partnership [PPP] model that allows us to open the doors to domestic and foreign investment, so that they are able to step in and replace the role of the state,” says Mr de la Torre.

At the same time, one referendum question concerns the repeal of a capital appreciation law that Mr Correa approved in December 2016 to reduce speculative behaviour in property development, but that paralysed the country's construction sector, the main driver of growth in the past decade.  

Yet the government cannot pull the interest rate lever to stimulate private investment through bank credit because the US Federal Reserve controls the overall offer of the dollar. Ecuador’s cabinet is thus refining a repatriation capital law to feed into the system much-needed extra resources to channel towards private investment. “We are aiming to generate incentives for people to bring capital back and invest in productive activities,” says Mr de la Torre, who adds that capital belonging to Ecuadorian citizens and held abroad amounts to between $10bn and $30bn, according to different estimates.

Need for stability

Mr Moreno surprised the business community – in a positive way – when he distanced himself from Mr Correa. “We are very surprised with the political evolution of the president, and we [support] his positive attitude towards the private sector,” says Patricio Alarcon, the head of Quito’s chamber of commerce.

However, measures such as the capital repatriation law risk miss the point, she adds. “They can pass it, and pass it the right way, but investors are looking for good signals and security for their investments. Once the country is stable and it’s a level playing field, capital is going to come back. The private sector in Ecuador needs competitiveness. We pay a lot of taxes in this country, more than our neighbours, and we aren’t competitive any more.”

Businesses and individuals in Ecuador have faced about 22 fiscal reforms in the past 10 years, which led to a threefold increase in fiscal revenues and in the number of taxpayers, besides serving Mr Correa’s wealth redistribution agenda. On the other hand, the reforms stand accused of hampering business.

Mr Moreno is now walking the fine line between fiscal liberalisation and the need to boost depleted state coffers. While he is pledging fiscal benefits for SMEs, he is planning a rise in the overall corporate income rate to 25% from the current 22%, and is retaining a debated 5% tax on capital outflows (known locally as the ISD). Mauricio Pozo, a former finance minister, says: “The ISD has been an important obstacle to foreign investment. Investors are reluctant to go where they get charged for pulling out money. He has to get rid of it. He can generate more revenues through VAT.”

Mending fences

Mr Moreno will have to mend fences with foreign investors beyond fiscal issues. Ecuador defaulted on its international debt in 2008, which tarnished its reputation in the international debt market. At the same time, it unsuccessfully fought the likes of US oil companies Occidental Petroleum Corporation and Chevron in international arbitration courts. Mr Correa eventually terminated the 12 bilateral investment treaties (BITs) providing legal ground for international arbitration.

“In big projects, investors look for BIT protections, even more if the state is the counterpart,” says oil minister Carlos Perez, referring to the concession of a long-promised, multibillion-dollar refinery in the western Manabí region. “We understand it’s a necessity we have to address. But in Ecuador, international arbitration is a sensitive issue; we have to look for alternatives to the ICSID [the World Bank’s arbitration court] and the court in The Hague.”

Any such reform would have to go through Congress, where Mr Moreno has yet to cement his popularity. His Pais Alliance party is divided between his supporters and Mr Correa’s loyalists. Expected for early 2018, the referendum is intended to settle this once and for all.

“If there is a possibility that the ex-president comes back, that will deter many members of the party from going with the current president,” says Mr Alarcon. “Once that gets resolved, then forces will align within the party and the president will be able to pass many more laws through Congress and to define his economic model.”

In just a few months in office, Mr Moreno has shown charisma and skill. Without forgoing the socialist nature of his political platform, he is using his capital to turn the page on the sometimes successful but certainly controversial Correa years. The real reach of the new president’s reforms hinges on the success, or failure, of the upcoming referendum. 

This article is sourced from fDi Magazine
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