The answer lies below the line
Fiscal results for the General Government for H1, showing a small overall surplus of around $0.4b, are better than expected. Also, the balance of trade shows a significant surplus of $2b, deposits and credit continue to grow steadily y/y, and international reserves are maintaining high levels of over $9b.
The question is whether this situation is sustainable in the medium-to-long term, and the answer always points to what is happening below the line. As long as Ecuador can secure long-term, low cost financing, the government and the economy should be able to navigate even through turbulent waters – but not forever.
The situation of the labor market is a black hole that cannot be filled merely with financing. Investment, local and/or external is needed, but the erratic political environment, the lack of confidence in investment protection regulations, continuous changes in the tax system and the proliferation of illicit economic activity are some of the major risks pointed out by domestic and foreign investors.
The riots of last June cast even deeper doubt on the ability of the government to connect with the people, especially with the lower and more needy economic classes, and made it crystal clear that President Guillermo Lasso has a powerful and unethical enemy in the Assembly. Negotiation tables between the government and indigenous representatives to discuss the requirements and conditions for these groups to stop the protests have been gathering irregularly, with no visible results, and only the table dealing with forgiveness of small loans has reached a fragile agreement.
In this context, many voices have been raised asking President Lasso to launch the long-waited referendum to make structural changes that have no chance in the Assembly and that address topics such as national security, labor reform, and political changes to ensure a more stable and viable relationship between the executive and legislators. The government has been hesitant about making such a decision, probably because when rates of presidential approval are low, referendums qualify or disqualify the president and do not solve the targeted problems. However, it seems that the government has finally decided to take the risk, but has not stated yet the questions that will be included, except for the issue of national security. Mid-October would be the deadline to submit the questions for the referendum for approval to the Constitutional Court, after which the Electoral Council will have 60 days to make the necessary arrangements to include this referendum with the local government elections of next May – if that is Lasso’s decision.
The risk of such a strategy is high because 2023 is an electoral year, and candidates from the opposition will no doubt take advantage of this to boost their campaigns with positions against the referendum. We concur with the idea that a referendum at this time is one of the very few feasible political paths for the government to continue its term without permanent blocks. However, President Lasso should analyze its timing very carefully.
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