Publish in Perspectives - Wednesday, February 7, 2018
President Lenin Moreno won a referendum to prevent un-limited presidential re-elections, effectively blocking the return of investor-hostile ex-president Rafael Correa. (Photo: Ecuador Government)
Ecuador President Lenin Moreno surprises investors with policy shift.
BY WALTER T. MOLANO
Whoa! What happened? Less than 9 months ago, former Vice President Lenin Moreno barely squeaked into the Presidency. With the opposition calling foul, along with reports of voting irregularities, most investors concluded that the elections had been rigged. It did not help that the Latin American left was crowing victory. Congratulations flew in from Venezuela and Bolivia. Venezuelan President Nicolas Maduro exclaimed that the, ‘Citizen’s Revolution had won.’ Likewise, Bolivian President Evo Morales enjoined that, “21st century socialism always wins.” The newly elected President Moreno was perceived as a continuation of former President Rafael Correa’s socialist policies. He was also seen as a virtual seat-warmer for Correa’s eventual return. Having been elected to two full terms in office, there was no doubt that Correa wanted another stint. Even before the elections, there were widespread fears that he would rig the process. On the eve of the elections, the president fired his military chief of staff, General Luis Castro Ayala, after he sent a letter to the high command reminding them to consider their constitutional responsibilities during the next round of voting. However, something strange happened after the elections. The jovial wheelchair-bound Moreno did not turn out to be as docile as he appeared, and an unseen streak of independence soon became apparent.
Soon after taking office, President Moreno proposed a referendum to prevent un-limited presidential re-elections. Other items on the referendum included a repeal of some of the more onerous measures and taxes that had been levied on the upper classes by his predecessor. The former president went into a rage and flew back from Brussels to lead a campaign against his ally. Moreno, which had been the bête noire of the Ecuadorian political right, was now their champion. The new leader turned against several of Correa’s henchmen, including two members of the Supreme Court, ordering them to be investigated. The spotlight next shifted to Vice President Jorge Glas, a close associate of President Correa, as well as a former cabinet member. Vice President Glas soon became entangled in the Odebrecht corruption scandal. He was indicted in November and sentenced to six years in prison. Last week, President Moreno tilted at one of the most sacred cows of the Correa regime. He said that Julian Assange, the renegade founder of WikiLeaks, who has been holed up in Ecuador’s London embassy for almost six years, had become a nuisance for his country. Few times have there been such a profound ideological transformation of a political leader in such a short period of time. It was as if he swerved into the political right lane, without putting on his blinkers.
It is true that Moreno’s ideological shift does not erase his country’s economic woes. With a debt burden approaching 50 percent of GDP, a fiscal deficit of about 5 percent of GDP and an economy that grew only 1.5 percent y/y in 2017, Ecuador economic situation is worrisome. This year, it will need to raise $9 billion to cover its financing needs. Fortunately, the recent jump in oil prices is a very positive development for the smallest member of OPEC. The country woefully needs foreign investment to modernize its struggling oil sector, but the antagonist policies of President Correa towards the private sector and foreign investors forced them to stay away. Instead, Ecuador became reliant on non-traditional sources of capital, such as the Chinese. Moreno’s radical shift is a strident signal to the international investor community that the country has matured and become respectable. Bond investors concur with the view, and spreads have narrowed significantly.
Yet, there is still a great deal of upside. In many ways, Moreno may not have the appearance of a suave businessman, but his actions speak louder than words. Recent reductions in public investment projects have helped narrow the fiscal deficit, which is much more than some of his regional counterparts have been able to accomplish.
Therefore, Ecuador should no longer be relegated to the backbench of Latin America. As a country that is poised to benefit from the ongoing rally in oil prices, and with a leader who has openly broken with the left, it could begin to receive the foreign direct investment that it needs to expand its oil production, stabilize its external and fiscal accounts and put the economy on a much more sustainable trajectory.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.