What’s in store for Ecuador under its new president?

Following a contentious presidential election that revealed the stark political polarization in Ecuador, President-elect Lenin Moreno prepares to take office on May 24th. Despite Moreno’s close ties to leftist President Correa and promises to maintain his predecessor’s social welfare spending programs, multinationals should brace for a period of uncertainty and austerity in Ecuador, as the country’s unsustainably high debt levels threaten economic recovery.

Moreno will inherit macroeconomic challenges

Ecuador’s economy is buckling given rising debt levels, stubbornly low oil prices, and a strengthening US dollar relative to the currencies of Ecuador’s main trade partners. After years of unsustainable spending on social programs, public services, and infrastructure under President Correa, his successor will need to increase the efficiency of public spending and boost competitiveness to avoid cutting popular social initiatives.

Moreno’s government must decide whether to maintain existing austerity measures, such as tax increases, import safeguards, and public spending cuts, and determine ways to increase export attractiveness. However, considering Moreno’s campaign promises to expand social welfare, he will face difficulty as increasingly unsustainable government spending will continue to create significant pressures on dollarization and long-term economic stability.

Ecuador will see a degree of policy continuity

Incoming President Moreno has vowed to keep President Correa’s “Citizens’ Revolution” alive, promising to continue prioritizing social spending despite the government’s inability to afford such initiatives for much longer. During his campaign, Moreno promised to provide free healthcare and education, build affordable housing, increase employment opportunities, and crack down on drug trafficking and crime.

However, Ecuador’s gross debt has quickly risen from 16.4% of GDP in 2009 to nearly 40% of GDP today, which raises doubts as to the country’s debt sustainability and means that Moreno will need to borrow significantly to finance his social programs. Moreover, he will experience additional financing challenges given his pledge to gradually lower taxes in line with President Correa’s agenda. Given these spending increases, MNCs will need to closely monitor Ecuador’s economic stability and dollarization sustainability. FSG believes that, to deliver on social spending promises, Moreno’s administration will need to pursue additional capital expenditure cuts and explore alternatives to drive down dollar demand for imports (such as excise taxes on imported goods) to confront a more adverse external environment as oil revenues continue to fall.

Opportunities for Moreno

A new face for Ecuador’s Alianza PAIS party presents opportunities for the country but will require policy changes that will deviate from President Correa’s positions. Since his party lost nearly 20% of its seats in the National Assembly, Moreno has the chance to collaborate with congress, build political capital, and implement a series of fiscal reforms to address the widening deficit and establish sustainable policy path.

Slight economic growth will return to Ecuador if the government can maintain access to foreign credit and attract considerable private investment. To be successful, Moreno will need to work with credit rating companies, the International Monetary Fund, and foreign investors to lower the perceived risk of investing in Ecuador and restore investor confidence, a task that will prove difficult given Ecuador’s history of contradictory and fluctuating economic, commercial, and investment policies.

Threats to monitor

MNCs will need to closely monitor:

  • The incoming government’s commitment to honoring its debts and maintaining the US dollar as its currency
  • Whether President-elect Moreno decides to extend excise taxes on imported goods (set to expire June 2017), or institute alternatives to subsidize exporters and tax importers, such as a “timbre cambiario”
  • Additional interest rate hikes by the US Federal Reserve, which could further undermine the competitiveness of Ecuador’s exports if the US dollar continues to strengthen against the currencies of trade competitors
  • Changes to the country’s tax code and investment policies, since these have historically made business planning more difficult in country
  • The evolution of oil prices over the next 6-12 months, as well as the incoming government’s response to dwindling fiscal revenues

Opportunities for MNCs

  • Government efforts to augment the inflow of US dollars to the economy could result in potential investment incentives and programs promoting local production
  • A boost to public-sector spending, particularly in the form of cash transfers, could result in a temporary potential uptick in consumer spending
  • Government spending measures, particularly in social welfare spending, could result in short-term opportunities in healthcare, education, and affordable housing development

For more detailed information on risks and opportunities for different industries under Moreno’s new administration clients can access our latest Ecuador Market Spotlight here.

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