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Feb 18, 2013 | 11:30 GMT

Ecuador's Next Four Years

Ecuador's Next Four Years
RODRIGO BUENDIA/AFP/Getty Images
Summary

Ecuadorian President Rafael Correa on Feb. 17 won election to another four-year term. Ecuador has changed in significant ways since Correa first assumed the presidency in 2007 — illustrating the changes taking place throughout Latin America — and the president will face a wide array of new challenges. During his first few years in office, Correa set in motion a series of fundamental changes. He rewrote the constitution, partly nationalized the energy sector and with his rhetoric he oriented Ecuador away from the United States and toward the Latin American left.

Three issues are likely to shape Ecuador over the next four years: the economy, the energy sector and the country's position in the region.

Ecuador's Economy

Correa's economic strategy over the past six years has revolved around public spending. Ecuador has the highest level in the region of public spending as a percentage of gross domestic product, a measure that hovered around 46 percent in 2011 and 50 percent in 2012. In 2013, Ecuador will need to obtain $6 billion — or around 7.75 percent of gross domestic product — to finance its fiscal deficit and its public debt.

To finance these social expenditures, Ecuador needs access to capital markets, but its $3 billion sovereign debt default in 2008 has distanced the country from international credit markets. And because Ecuador does not have its own currency — it adopted the U.S. dollar as its official currency during its 2000 economic crisis — the government's policy options are somewhat limited. In order to finance its outlays, Ecuador has had to levy unpopular bank taxes, centralize control over the energy sector and borrow from China in exchange for oil.

Unless Correa dramatically scales back social expenditures — an unlikely prospect because of the popular backlash it would probably provoke — Ecuador will have even fewer options and may need to look for new sources of financing. Correa may follow Bolivia's lead and issue sovereign bonds on international capital markets. Alternatively, he may echo Venezuela and issue bonds from Ecuador's state-owned energy companies, Petroecuador and Petroamazonas. Also, he could scale up oil-for-credit agreements with China.

Access to capital probably will not deteriorate to a crisis point in Correa's next term, but Ecuador's search for financing will place additional pressures on certain sectors of the economy and will likely lead to the emergence of new international dependencies.

Ecuador's Energy Sector

In the energy sector — a major pillar of the Ecuadorian economy — Correa will need to carefully balance economic, environmental and social interests. In the coming years, Correa will work to expand both upstream and downstream production, maintain environmental friendliness and continue popular energy subsidy programs. These objectives are not mutually exclusive but they do represent competing interests, and pursuing them simultaneously may prove challenging. The government may therefore feel compelled to pursue one tactic at the expense of another. Due to a number of constraints, Correa will likely be forced to compromise over the next four years.

Ecuador will have difficulty expanding its energy sector because of its inability to attract significant foreign direct investment. In 2006, the Ecuadorian government annulled Occidental Petroleum's concessions in an action that the World Bank's International Center for Settlement of Investment Disputes claimed is "tantamount to expropriation." In 2007, seeking greater control of the country's natural resources, Ecuador's government implemented a 99 percent windfall tax, which essentially changed contracts from production-sharing agreements to service contracts. These measures increased the amount of oil revenue going into government coffers, but they undermined Ecuador's appeal as a destination for energy investors.

China has taken advantage of the opportunities created by Ecuador's relative isolation from other foreign capital markets, investing nearly $2 billion in the Coca Codo Sinclair hydroelectric power plant, and the China National Petroleum Corporation is now considering taking a 30 percent stake in the $10 billion, 300,000 barrels per day Refinery of the Pacific. But China's investments may not be enough to significantly increase production in the energy sector over the next four years.

The energy sector accounts for roughly a third of all fiscal revenues, and if production stagnates, it may compel the government to either reconsider its environmental agreements or its subsidy program. Crude oil production has been increasing since 2009 but remains below the peak production levels seen in 2006. Stagnation in the energy industry may pressure the government to abandon hopes of securing funding for not drilling in oil fields under the Yasuni National Park. The government is seeking 50 percent of the value of the fields, which are estimated to contain 846 million barrels — 20 percent of the country's total proven reserves — in exchange for preserving the park environment. Alternatively, if the energy sector cannot keep up with desired social expenditures, the government may be forced to reconsider costly gasoline subsidies.

Ecuador's Foreign Policy

Ecuador is part of the Andean Community customs union and is surrounded by countries that are in the Pacific Alliance, but the country has recently shown interest in joining the Mercosur trade bloc. Yet unlike Venezuela, which left the Andean Community in 2011 and entered Mercosur in 2012, Ecuador is trying to benefit from both blocs simultaneously. While it is still uncertain if this is legally possible, given Mercosur's common external tariff, Ecuador is nonetheless trying to work out a compromise. This demonstrates the constraints on Ecuador's international posture. Mercosur represents an important opportunity for Ecuador to expand its market access to regional countries, but membership in the bloc becomes less valuable if it forces Ecuador to downgrade its existing trade relationships. 

These issues are very different from the political instability and economic crisis the country faced in 2007 when Correa assumed power. That said, in developing his political platform further, Correa will inevitably run into the same constraints that Ecuador has always faced. Over the next four years, it will be important to watch whether Correa can institutionalize his political platform and create a viable political succession.

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