Too many doubts, too many delays, and a step back
President Moreno has given preferential attention to the reconstruction of democratic institutions, achieving important even if insufficient outcomes. However, restoration of the macroeconomic and fiscal equilibrium still evidences weaknesses in its conceptual and practical development. A lack of clarity and assertiveness when informing the nation of the current economic and fiscal situation, along with continuous doubts and delays when making decisions on economic management, have taken their toll on the government, not only regarding its credibility in effectively achieving a successful transition from the past administration, but also on its political strength.
December was challenging for the fiscal accounts, which reached historic lows, and even the payment of public salaries was delayed. Greater-than-expected tax collections, mainly from international oil companies, and a small Chinese loan saved the situation, providing temporary relief, but the absence of a longer-term direction cannot be hidden behind claims of good intentions.
A faulty political strategy behind the decision to reduce subsidies on derivatives brought harsh protests from the transportation sector regarding the diesel price increase and ended with the government’s taking a step back on this decision.
In addition, evidence of blatant corruption continues to mount, and a recent investigation conducted by a commission from the United Nations found total overpricing of over $2.5b on some of the emblematic mega projects of the Correa era, assessing that approximately $600 million will be necessary to correct technical failures.
People’s pessimism and disappointment over the above-mentioned lack of assertiveness in economic management and the pale results rendered by the legal system in punishing corrupt former government officials are not helping President Moreno, who is trying to navigate difficult waters by sending a positive message that lacks full credibility.
The economy grew at marginal rates in 2018, with Q3 up 0.9% q/q and 1.4% y/y. However, important industries such as construction and manufacturing are showing stagnation, leaving oil production and refining as the sectors behind this slow growth. Thus, it is not surprising that the consumer confidence index remains at levels similar to those of 2016, when we were going through the worst of the oil crisis.
Swings and low levels of international reserves are creating concerns beyond the fiscal situation. It is the consensus among analysts that an agreement with the IMF should not be postponed on grounds of political calculations.
President Moreno and Minister Martinez announced a follow up economic law (Incentives for Production II) to stimulate production with further tax benefits for new local and international investment. This is another positive step that could be wasted if the government does not learn from 2018, taking the bull by the horns and getting ready to stand firm when public discontent emerges.
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