Highlights
– President Correa secures an unprecedented first-round election win
– Correa vows to continue strong “social revolution”
– Economic factors will require Correa to take a more pragmatic approach to foreign debtors in the near-term
On April 26, 2009 President Rafael Correa secured a second-term by winning an overwhelming majority vote in the country’s presidential election. The President’s strong support stems from a prioritization of large-scale social spending over economic growth. Correa will likely maintain aggressive protectionist policies against foreign investors in his second term. Nevertheless, the deepening global economic recession will likely force the president to seek out international financial aid, requiring greater fiscal austerity in the near to medium term.
The Correa Model
President Correa came to power in 2006 and introduced a constitution in 2008 that more than doubled Ecuador’s public expenditures to US$21 billion. Correa’s protectionist and socialist agenda is unmistakable. Since 2006, the Correa administration defaulted on interest payments for 32 percent of the country’s US$10.1 billion foreign debt, forged ties with socialist Venezuelan president Hugo Chavez, and criticized the International Monetary Fund (IMF) for its policies in Latin America. The Ecuadorian president also led a combative relationship with the United States (US); as he expelled two US diplomats, discontinued a US lease to operate drug-monitoring flights from an Ecuadorian base, and imposed steep tariffs on 630 imported goods.
Payment Deficits To Play A Part
Ecuador spent approximately 70 percent of the national budget on servicing public debt since the 1980’s. Ecuador’s audit commission conducted an unprecedented review in 2008, determining conditions surrounding its debt were “illegal and illegitimate” according to international laws. Correa ordered a refinancing and suspension of repayments, a decision that now limits his options on how to finance a growing fiscal deficit with new credits.
Finance Minister Maria Elsa Viteri indicated in April that Ecuador will reassume approximately US$3.2 billion in Global 2012 and 2030 bonds, nearly 32 percent of its total foreign debt, and will settle these by May 26, 2009. Viteri later confirmed the administration would not pay interest on its defaulted bonds and would not revise any terms of the proposal. The proposal is a moderating move away from the hard-line anti-capitalist policies of Correa’s first term. These actions are likely intended to ease relations with investors, and suggest Correa may adopt a softer approach toward reviving Ecuador’s economy in the near term.
Continuation of A “Socialist Revolution”
Despite his overwhelming victory, Correa will need to avoid disappointing Ecuador’s volatile electorate. Ecuador’s voters ousted three previous presidents in the decade preceding Correa’s first term. Correa’s political capital will lie in the public’s patience with a worsening economy.
Correa will attempt to sustain, and possibly increase, social spending programs in the near term, despite the country’s poor finances. Maintaining a tough stance against foreign investors will take top priority as Correa appeals to populism to maintain his political power. The President will push for more state control of the mining and oil industries while working to once again renegotiate the country’s debts.
Ecuador’s increasing payment deficit, lower market prices for oil, reduced remittances from the US and Spain, and a lack of foreign investment will keep Correa restrained in the near-term. Continued economic weakness could force Ecuador out of a dollarized economy, inflicting huge economic losses on its already suffering people.
