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Protests are growing against President Rafael Corea amidst an econoimic slowdown and an S&P downgrade. Here capital city Quito. (Photo: Patricio Mena Vásconez)
Wednesday, August 19, 2015
Perspectives

Ecuador: Slippery Slope


Trade protectionism backfires, S&P downgrades and protests grow.

 

LATINVEX SPECIAL
Analytica

 

The wait to cross the border into Colombia by car reached hours over the long holiday recently as thousands of Ecuadorian consumers sought to go shopping there. A year ago, the Colombian peso traded at close to 1,900 to the dollar; at present, it has plunged to almost 3,000, a weakening of 58 percent, exerting an irresistible attraction on shoppers from south of the border. Data for this kind of cross-border trade is lacking given the random nature of controls by customs officials and the large amounts of cash Ecuadorians have withdrawn from bank accounts in recent months. It does however indicate difficulties in convincing residents of the government's wisdom in trying to stymie imports through major increases in duties, in effect since March.


If the administration
thought it would slow the exodus of dollars through protectionism, it was mostly wrong, as first-half trade date showed. In the first six months of this year, Ecuador registered a trade deficit of $1.22 billion, widening from $799.7 million in January-June of 2014, according to data published by the Central Bank of Ecuador (BCE) this week. In the first half, exports plummeted 26.8 percent on the year to $9.83 billion from $13.43 billion. Imports decreased significantly but far more slowly. On their part, imports dropped 13.3 percent in the same period, totaling $11.04 billion, compared with $12.74 billion in January-June last year.


The trade deficit stemmed largely from the plunge in the price of oil. In dollar terms, oil exports plunged 47.2 percent on the year in the first half to $3.82 billion from $7.24 billion in the same period last year. Non-oil exports in dollar terms also declined, falling 3 percent to $6 billion from $6.19 billion in the same comparative periods. In contrast, export volumes in both categories rose, indicating no impact from the stronger dollar on their competitiveness. Oil export volumes increased 5.8 percent on the year to 11,092 million metric tons from 10,488, the BCE reported. Volumes of non-oil exports rose similarly, climbing 5.4 percent from 4,583 million tons to 4,832 million tons in the same months. Considering the decline in export earnings, the volume gains won't provide the administration and exporters with much solace.


The punitive duties, which have made Ecuador unpopular among commercial partners, appear to have had some effect nonetheless as the non-oil trade deficit narrowed 15.9 percent to $2.82 billion from $3.35 billion. But if the administration thought the worst of the oil decline was truly over and that the duties would offset the situation, it miscalculated. Meanwhile, the price of oil faces key trading sessions to see whether it will be able to hold above March's 52-week low of $42.03 per barrel for West-Texas Intermediate, the benchmark for Ecuadorian crude. And, to make things potentially worse, the Cotopaxi, the world's highest active volcano, after decades of dormancy experienced several explosions on August 14, potentially posing another threat to the economy.

BACK IN LINE

Ratings agency Standard & Poor's last week downgraded Ecuador's long-term credit rating to "B" from the previous "B+" amid the worsening economic and political environment, as S&P noted. The move brought Ecuador's S&P rating more in line with those of the other two leading ratings agencies, Fitch ("B") and Moody's ("B3," or B- equivalent), at five notches under "investment grade." The decision nonetheless came as a surprise given the "stable" rating for the outlook on the debt – the agencies tend to provide market guidance as to their next move by adding "positive" or "negative" to their outlook ahead of a change.

S&P noted the influence of the tumble in the price of oil on government finances; "lower revenues from oil have led the government to attempt to raise other revenues in order to sustain expenses and aggregate demand."

While we agree with this comment, we are less convinced with the somewhat contradictory analysis that the loss of oil revenue has "also prompted the government to cut more than $1 billion in planned capital expenditure" given president Rafael Correa's adamant wish that hydroelectric plants and other infrastructure projects remain on track. S&P's added that "both efforts have met with social protests and have subsequently partly been modified."

The agency may be referring to the cuts in the government contribution to social security funding and the "temporary" reprieve in changing tax legislation yet again to increase what the president sees as windfall gains in real estate market revaluations and in inheritance taxes (see below).

But the changes to social security haven't been rescinded and Correa continues to insist on eventually carrying out the tax hikes. S&P does correctly note the volatile political and economic situation that is likely to continue through the end of Correa's term and the electoral campaign of 2017, currently overshadowed by his drive to have the constitution changed to let him compete for office once again. That would be his third straight term since the new charter went into effect in 2008.

GROWING TENSION

Street protests returned to Ecuador with a vengeance on August 13 as perhaps as many 200,000 people participated in nationwide demonstrations against the Correa administration. Labor organizations had called for a "general strike." While most businesses operated regularly and media reports of a near or complete "standstill" are rather exaggerated, roadblocks impeded or at least slowed intercity transport in many locations, marking the return of a protest tactic employed by the indigenous umbrella organization CONAIE during the 1990s and early in this century.


Once again, the mood on the streets was generally upbeat, but a growing climate of hostility and confrontation led to a higher level of violence in what to date had been a remarkably peaceful and even festive series of protests. One indigenous demonstrator at the close of this edition was between life and death after allegedly being hit by a police bullet on Santo Domingo square, one of many locations that became sites of police repression as the demonstration was dispersed in the evening hours. Indigenous leaders Carlos Pérez and Salvador Quishpe, who had supported the strike with a march to Quito from the far southeast of the country, were detained and beaten. A standoff between demonstrators and police over the situation of Manuela Picq, Pérez's partner, emerged during the night at a public hospital where she had been taken after having been beaten by officers during Pérez's arrest, providing an eerie resemblance to the September 30, 2010 police mutiny during which Correa himself had sought refuge in another hospital in the capital. Conservatives, too, supported the protest, with both Guillermo Lasso, a former banker who came in second behind Correa in the 2013 election, and mayor Jaime Nebot marching in Guayaquil, Ecuador's biggest city.


The president, meanwhile, retreated to the presidential palace, cordoned off by the police that blocked all accesses to the Plaza Grande (Independence Square), a place of huge symbolic importance, from where he blasted the protestors. "Everyone has the right to demonstrate, to protest if their rights are being violated, but what rights are being violated here?" he questioned, complaining of "whimsical" opposition demands.

He downplayed the demonstrations, saying that maximum 5,000 people had taken part.

For many protestors, the staggering tax increases on real estate gains and inheritances first announced in Correa's state of the nation speech in May were the last straw, but the protests also reflect a deeper feeling of dissatisfaction with how the country has been run.

Restrictions on freedom of expression and assembly, judicial independence, a lack of investigation into corruption allegations and displeasure over the president's arrogant, insulting public behavior appear to have synthesized into a strong rejection of his desire to remain in power. While his term ends in 2017 and the 2008 constitution says he can't be reelected after his current, second term, he aims to have term limits scrapped. He has the congressional votes to do this, but polls put opposition to his plan at around 80 percent. Correa is thus right to say that protests will continue.

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission.

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