Ecuador: Weathering fragmentation and austerity costs

Date first published: 4/4/2019

Key sectors: all

Key risks: non-payment; governability; civil unrest

The government of President Lenin Moreno is set to weather heightened political fragmentation and overall austerity costs. Since taking office in May 2017 Moreno has made it clear that he would not fall short of efforts to move away from the legacy left by his predecessor, former friend and ally Rafael Correa. Such moves have led to restoring relations with multilateral lenders, an improved business environment, substantial efforts to strengthen institutions, the implementation of a thorough fiscal consolidation plan and an unprecedented overt opposition to Venezuelan President Nicolas Maduro. Nevertheless, the left-wing Alianza PAIS (AP), from which Correa quit in January 2018 in opposition to Moreno, failed to win major cities in the 24 March local elections. This indicates that fragmentation will remain a key feature ahead of the next general elections, scheduled for 2021. Moreno’s recent decision to resort to the International Monetary Fund (IMF) to address a pressing fiscal crisis and large foreign debt means austerity will also remain the norm at least until then. The management of the political costs associated with these developments will have a strong say on whether Ecuador consolidates the shift to the centre/centre right or returns to populist, leftist rule.

Local elections demonstrated that Correa’s influence in the political landscape is far from having disappeared. Fuerza Compromiso Social (FCS) – which encompasses Correa’s allies and former AP members – came in second with 18 per cent of the vote in the capital Quito, with the winner – independent Jorge Yunda – securing just 21.4 per cent. The centre-right opposition Partido Social Cristiano (PSC) achieved relevant victories, including three of the country’s ten most populated cities: Guayaquil, Duran and Portoviejo. The positive performance placed its leader, Jaime Nebot, as the potential conservative contender in the 2021 presidential vote, with the PSC formally replacing Creando Oportunidades (Creo) as the leading conservative party. Moreno therefore faces fragmentation from the left and from the right while dealing with further potential dissent within the AP should austerity lead to increasingly vocal anti-government sentiment. The risk of having to resort to populist measures to appease such discontent therefore remains. As such, the IMF’s involvement further complicates Moreno’s ability to achieve a balance between the two camps.

Playing by the book with the IMF will be crucial to a avoid a relapse into Ecuador’s longstanding reputation of being a ‘serial defaulter’. Following months of calculated rapprochement, the Fund approved a three year US$4.2bln Extended Fund Facility (EFF) and authorised the immediate disbursement of US$652m on 11 March. The deal unlocked a further US$6bln pledged by other multilateral lenders, including the World Bank and the Inter-American Development Bank. With 2019 financing needs estimated at US$9.1bln, a 2018 fiscal deficit of around 4 per cent and January 2019’s US$1bln 10-year bond issuance yielding a massive 10.75 per cent, the news of the agreement with the Fund was well received as further bond issuances would have been unsustainable. Such an agreement, however, will see the austerity programme intensify, potentially including tax reforms, the privatisation and/or restructuring of state-owned companies alongside spending and subsidy cuts that will likely fuel anti-government sentiment and potentially stoke unrest. The opposition will also be quick to capitalise on any such deterioration of Moreno’s political capital. Severe instability and governability risks are not yet expected, but may soon emerge.