Ecuador Special January 2017


Ecuador: Ecuadoreans to decide between policy continuity or a move to more market-friendly policies

January 13, 2017

Ecuadorians will head to the polls on 19 February to elect a new president and members for the 137-seat National Assembly at a moment when the economy is stuck in the deepest recession seen since its dollarization. This is the first time in ten years that ruling party Alianza País (AP) has put forth anyone other than incumbent president Rafael Correa. AP is backing former-Vice President Lenín Moreno who looks to extend the AP’s decade-long hold on power at a time when the collapse of energy prices has rocked the government’s fiscal accounts and exposed an underlying lack of competition in the non-oil sector. How these issues are addressed will largely depend on the result of the election. A Moreno victory—the most likely outcome according to the latest polls—would signal relative continuity in economic policy, while a victory for one of the two main right-wing opposition candidates could see a reversal in Correa’s big government approach and a faster economic adjustment.

AP’s national reach and incumbent advantage after a decade in power, coupled with a splintered opposition, bode well for Moreno’s chances of being chosen as Ecuador’s next president. However, a sizeable percentage of the population is still undecided, which could tilt the balance to either side. If Moreno fails to win the first round with more than half the vote, or with 40% of the vote and a 10-point lead over his closest rival, then a second round will be held on 2 April. This would provide opposition parties with an opportunity to rally around the candidate that goes to the run-off vote against Moreno. Polls suggest Moreno’s opposition would be Guillermo Lasso of the Creando Oportunidades party (CREO), Cynthia Viteri of the Socio Christian Party (PSC) or Paco Moncayo of Izquierda Democrática (ID).

While the AP’s campaign has focused on highlighting the country’s achievements under Correa’s administration, deteriorating economic conditions are expected to work in favor of the opposition. Lasso has pledged to promote greater private investment and tackle growing unemployment, reverse Correa’s high tax approach, and diminish the role of the government in the economy. Viteri’s campaign pledges are relatively similar—she has promised to increase the flexibility and efficiency of Ecuador’s labor market, lift foreign direct investment inflows into the country and suppress several duties and taxes. Meanwhile, Moncayo appeals to disenchanted former supporters of the AP, vowing to shield Ecuadoreans from the effects of the economic downturn and demanding higher responsibility from the private sector.

Ecuador’s next president will have to deal with an expensive external debt, an incomplete deflationary adjustment that shows no signs of abating, a faltering economy and the need to implement fiscal consolidation measures. The dollarized economy has suffered notably from a loss of competitiveness on the back of rising U.S. interest rates, which is keeping the U.S. dollar strong. Low oil prices have also dragged down on the industrial sector, while a faltering labor market has weighed on household consumption and has kept inflationary pressures at bay. In turn, weak domestic fundamentals and low oil prices have weighed on the state’s fiscal revenues. Expenditures have been curtailed only slightly, with notable reductions in capital expenditures being offset by the reconstruction efforts following April’s earthquake and higher payments from external debt and a large salary bill.

February’s election could see the end of ten years of “Correista” hegemony. An opposition victory would translate into a faster economic and fiscal adjustment, which would bode well for international investors but could jeopardize Ecuador’s incipient economic recovery. Adding to that, the president would most likely face fierce opposition from AP lawmakers in the National Assembly, where the incumbent party is likely to maintain a plurality as a result of divisiveness among opposing factions. Conversely, a Moreno presidency would have an easier time dealing with the Assembly, but it would entail a more gradual fiscal adjustment and a more hesitant approach to private enterprise. The outcome of the election will thus be essential to shaping the outlook for Ecuador in coming years, as Ecuadoreans decide between policy continuity and a turn to more market-oriented policies. Taking the current political scenario into account, FocusEconomics panelists expect the economy to shrink 0.3% in 2017, which is down 0.3 percentage points from last month’s forecast. The panel is more optimist regarding 2018, when they project the economy to grow 0.8%.

Author:, Economist

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