Sudden attacks rattle an inexperienced government
For the last 40 years, Ecuador is fortunate to have been virtually untouched by the terrorism plaguing neighbors Colombia and Peru. Now that’s abruptly changed: over the past month, four soldiers were killed, three journalists were kidnapped and executed, and a young tourist couple was kidnapped, all by dissident FARC members who refused to join the so-called Colombian peace agreement.
This is the first time Ecuador is facing such a predicament, and two issues became immediately clear. The first is the condition of defenselessness in which ex-president Rafael Correa left Ecuador, after 10 years of viewing the FARC as “subversive forces” rather than terrorists. So state policy (or the lack thereof) led to wasted spending on arms and surveillance equipment. The second is that President Lenín Moreno’s inexperience has forced him to deliver an ultimatum to his ministers of interior and defense: he’s ordered them to capture the suspected masterminds of these horrendous crimes within 10 days.
This crisis has overshadowed the scandal raised by the Comptroller General’s recent report on public debt. The report not only establishes civil, administrative and penal responsibilities for Correa, and his former ministers Fausto Herrera and Patricio Rivera, but also issues legally binding recommendations for Finance Minister Maria Elsa Viteri, and complicates financing scenarios for 2018.
The fiscal austerity part of Viteri’s economic program includes expense-cutting and public assets sale, and aims to generate savings of $1 billion. It also posits reducing tax evasion, and eliminating tax deductions for people earning more than $100,000 per year. Viteri says these changes should allow the government to cut the deficit from 5.6% of GDP in 2018 to 2.5% in 2021. Even if 100% effective by 2021, though, debt will remain at around 60% of GDP, and financing needs will average $10 billion per year for the next four years.
On the bright side, in 2017 the economy grew by 3% y/y and 1.2% q/q in Q4 – the highest growth rates since Q4 2016. This boost helped push underemployment down to 2% in March 2018. Non-oil exports increased by 7.7% y/y, below the 18% rise in imports, leaving a sectoral trade deficit of $3.2 billion, just $89.2 million below the oil sector surplus. This gives the government an argument for continuing import controls.
Ecuador seems unlikely to maintain a 3% growth rate in 2018. Forecasting 2019 is challenging now, as we are facing a key transitional period, when the government must show its will to quickly implement its economic program. The private sector, for its part, must increase investment to replace public money, and create jobs that take advantage of the tax reduction the new economic program offers.
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