Ecuador economic “miracle” meets maturity

By Rob Cox
September 11, 2014

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Turn on state television here, and within an hour or so a public service message will appear extolling the “Ecuadorean miracle” of President Rafael Correa. The advertisements highlight big new infrastructure projects and endorsements by experts, even an American or two.

Coming on one of the many formerly private channels that Correa tucked under government control during his seven years in office, it’s easy to dismiss this as propaganda. Yet here’s the thing: nearly every ordinary Ecuadorean I met during a recent stay was able to answer the Reaganesque question, “Are you better off now?” in the resounding affirmative.

To the amazement of Correa’s critics, Ecuador has undergone a relatively sustained period of economic progress since he took office in 2007. Annual growth in gross domestic product has averaged 4 percent. Unemployment is below 5 percent. Wages are up. Inflation is a tame 3.1 percent thanks to the dollarization of the economy before his accession. The percentage of Ecuador’s 16 million people living below the poverty line has dropped to 25 percent from some 45 percent before Correa became president.

The infrastructure improvements are evident everywhere, from the shiny new Quito airport and the highway that leads to the capital, to the 95 new bridges spanning the jungle chasms of the Amazon region. Regional hospitals are being built, and universal education has been made more accessible to everyone, its quality improving. Infant mortality rates shrink every year.

Calling them miraculous, though, is hyperbole best confined to the Spanish colonial churches that make Quito a UNESCO world heritage site. Correa projects himself as something of a revolutionary. The truth is more banal.

After years of disastrous stewardship, military regimes and outright graft, Correa ushered in a period of uncharacteristic stability for a nation blessed with resources, both human and natural – chiefly oil. It is no coincidence that Correa’s miracle years coincided with a period of sustained record prices for crude. The OPEC nation deserves credit for not squandering this bounty.

The question is how Correa keeps it all going. Ecuador’s finances aren’t parlous, but they are not sufficient to continue the Chinese levels of investment spending that have fueled growth. Ecuador last year had a fiscal deficit of 4.7 percent of GDP, according to Standard & Poor’s, a figure that is expected to rise. The country needs to fund that gap somehow.

The trouble is Correa’s past defiance. He has tussled with the World Bank, kicked out the U.S. ambassador, renegotiated oil and mining contracts and defaulted on $3.2 billion of debt during the financial crisis.

Correa has been able to borrow from the Chinese, using forward oil sales and other mechanisms to bring in dollars. The finance ministry recently confirmed talks with China Development Bank to renew a $1.5 billion credit line. But Chinese funding cannot reliably plug the growing fiscal gap. Indeed, a $9 billion Chinese financing to construct a 200,000 barrel-per-day Pacifico Refinery appears to have stalled this year, according to Reuters.

So Correa has to start playing nice with the world of money. That appears to be happening – even though his public remarks may still be more Hugo Chavez than Hank Paulson. And he still has WikiLeaks’ founder Julian Assange holed up in his London embassy, where he receives dignitaries like “Baywatch” star Pamela Anderson.

For instance, Ecuador did manage to return to the bond market in June, raising $2 billion. But it had to pay nearly 8 percent in interest. Neighboring Bolivia, led by Chavista president Evo Morales, paid just 4.875 percent a year earlier.

Then last month Ecuador concluded its first “Article IV” consultation with the IMF since 2008. True, it was a far cry from the normal process. Rather than the country hosting a delegation from the multilateral lending institution, IMF and Ecuadorean officials met in Washington and communicated remotely. Nor was the full text of the report released. But the tone of the IMF’s press statement, released jointly with Ecuador, was broadly positive.

Ecuador’s bridge-building efforts are being modestly rewarded. S&P recently raised its long-term debt rating on the country, saying “the government has shown greater signs of pragmatism with efforts to attract foreign direct investment in the oil and mining sectors, re-engage multilateral institutions … and boost public investment to try to stimulate economic growth.”

Having forced foreign oil companies to trash their production-sharing agreements, Correa’s government backtracked slightly in 2012 to try to interest oil majors in a baker’s dozen of fields opening for exploration in the Amazon.

Similarly, Correa softened rules governing mining concessions – first tightened in 2008 – to reinvigorate investment by making windfall revenue taxable once an initial investment has been recovered. So far, however, foreign direct investment has not picked up much.

Not surprisingly, Correa’s government sees its relationship with global markets as a two-way street. As Fausto Herrera, the finance minister, put it to me in a recent conversation in his office in Quito, “in 2007 and 2008, the rules of the world were much more aggressive when it came to interfering in the public policies of other countries.” The relationship with the IMF and the World Bank is one of “respect.” As a founding member of both, “we fulfill our duties.”

Coming from Herrera, who considers his role “to lower our financial costs,” this may not sound very revolutionary. But less than three years ago his boss stormed out of a Latin America summit, railing “Why do I have to listen to lectures from the World Bank vice president, who openly blackmailed my country?” In 2007, Correa kicked the bank’s representative out of Ecuador after it withheld a previously agreed loan.

Fiery rhetoric, combined with the boosterish messages on the television stations he controls, will keep Correa popular at home, perhaps even long enough to reform the constitution to give himself another term beyond 2017. But outside Ecuador’s borders, don’t be surprised to find a more accommodating Correa when he passes the hat around.

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