Ecuador: February elections signal choice between policy continuity or interventionist approach
January 19, 2021
On 7 February, Ecuadoreans will head to the polls to elect a new president and members of the 137-seat National Assembly. Opinion polls suggest that the election is likely to be a close race between correísta candidate Andrés Arauz, for the leftwing Union for Hope alliance (UNES), and Guillermo Lasso, who is leading a center-right coalition formed between the Creating Opportunities movement and the Social Christian Party (CREO-PSC). In addition, the two contenders are followed by indigenous candidate Yaku Pérez for the Pachakutik party. If no single candidate manages to gain more than half the vote, or 40% of the vote and a 10-point lead over the second candidate, a run-off will be held on 11 April 2021—the most likely scenario. A Lasso victory would signal broad continuity in economic policy, while a victory for Arauz could see a reversal to a more interventionist government approach. However, a potentially divided National Assembly could make it difficult for the new president to realize their agenda, which, coupled with likely muted oil prices and the weak fiscal position, should limit the scope for radical policy changes. Regardless of the outcome, priorities will include addressing the harsh socio-economic impact of the pandemic—with Ecuador being among the hardest-hit countries in the region—and setting the country on the path to fiscal consolidation.
Arauz is expected to pursue an economic policy comparable to that of former president Rafael Correa, envisaging growth through increased public spending, and a new wealth tax. Moreover, he plans to reestablish coordination between the Central Bank and the Ministry of Finance, to enable the purchasing of government securities for urgent financing needs. Notably, if elected, Arauz will seek to renegotiate the USD 6.5 billion arrangement struck with the IMF on 30 September, and he has even hinted at the possibility of abandoning the agreement. Similarly, Pachakutik’s candidate, Pérez, has publicly declared that he would review the deal, opposing its tax increases; he advocates for a sustainable recovery, on the basis of environmental protection. On the contrary, Lasso is largely expected to comply with the IMF’s loan program, likely pursuing market-oriented policies. Moreover, he has pledged to drive growth through higher foreign investment, reducing taxes—including VAT cuts—and tackling unemployment. Therefore, the election result is expected to shape the outlook for Ecuador in the coming years, as voters decide between policy continuity or a return to correísmo.
Commenting on the possible electoral outcome, analysts at Goldman Sachs highlighted:
“Some observers worry that a victory by the left could, over time, undermine relationships between Ecuador and international investors and the IMF, with obvious negative implications for the sovereign credit. A victory by Mr. Lasso, on the other hand, could prove positive for markets. However, […] there would be no assurances that a Lasso administration would be able to implement needed reforms in a timely manner, especially if the elections result in a fragmented Congress and limited governability conditions.”
Looking at the outlook for the fiscal balance, Carlos de Sousa, lead EM economist at Oxford Economics, said:
“The next government is expected to approve a wide-ranging tax reform yielding 2.5% of GDP in additional revenues by end September 2021. However, the 2021 elections will likely yield a divided National Assembly, which will probably result in a watered-down tax reform—we assume 1% of GDP in additional fiscal revenues from 2022 onwards in our projections. Our modest reform assumptions still lead to a small budget surplus in 2022 and a debt-to-GDP ratio of 56% by 2025. Fiscal revenues recovered faster than expected in Q3 (-22% y/y compared to -41% y/y in Q2), leading us (and the IMF) to upgrade our forecast.”
Author: Alexandros Petropoulos,