Lenin Moreno and the Future of Ecuador

07.20.17
Micaela Ayala V.
World News /20 Jul 2017
07.20.17

Lenin Moreno and the Future of Ecuador

By Olivia Gass for PGW Global

Ecuador’s new President, Lenín Moreno, is an unusual politician for more reasons than just his idiosyncratic first name. Moreno is a paraplegic who was shot during a robbery-gone-wrong in 1998. In the course of his convalescence, Moreno turned to laughter therapy, later setting up a foundation to encourage humor and joy. He is likely to need all his reserves of good humor in his new position as he takes responsibility for his country’s governance.

Moreno’s victory celebrations are likely to be short-lived as the challenges of governance land on his desk. His dilemma will be how to satisfy the demands of his left-wing supporters for continued high spending on Ecuador’s public services, while simultaneously managing a shrinking economy, whose reliance on stagnant oil revenues and addiction to debt, limit his room for maneuver. If he fails to solve this puzzle there is a risk that his government will be tempted to deal with public protests through heavy-handed state intervention. This has been seen in Ecuador before when, in 2015, police used tear gas and clubs to disperse protesters.

There are three important questions hanging over Lenin Moreno’s presidency. First, how Moreno is likely to address the problems facing Ecuador’s economy and the strain that will place on public services which have been generously funded by the previous government. Second, the question of Moreno’s independence from former President Rafael Correa. And finally, why Ecuador will not suffer the same fate as Venezuela.

El Presidente Lenín Moreno

The election in Ecuador was a bitter campaign defined by Ecuador’s increasingly polarized politics: a wealthy center-right banker versus a presidentially-backed socialist. Former president Rafael Correa claimed his party was battling “against the global right wing.” The results were a victory for Correa’s handpicked candidate and former vice president, Lenín Moreno.

However, it was not the smooth transition that Correa and Moreno would have hoped for. Following a mysterious shut down of the electoral website and a consequent spike in votes for Moreno, the leader of the opposition, Guillermo Lasso, and his supporters have accused the government of electoral fraud. Anti-government protests have spread across electoral offices in Quito and Guayaquil, with thousands taking to the streets. Though international observers have deemed the election fair and the regional governments have been quick to give their support to Moreno, this early questioning of his legitimacy has created a less than ideal beginning for his presidency. Despite this, however, President Lenín Moreno is here to stay, barring a cataclysmic turn of events in Ecuador.

What is uncertain is what his presidency will mean for the future of Ecuador.

Economic Uncertainty The core issue for Moreno will be Ecuador’s flagging economy. During his presidency, Correa spent huge amounts on improving social services which were ultimately fueled by the oil revenue which makes up about 40% of Ecuador’s exports.

Ecuador’s oil sector is dominated by two companies Petroecuador and Petroamazonas. Both are state owned companies, though Petroamazonas does operate under relative autonomy. Late last year, Petroecuador found itself at the center of a huge corruption scandal that saw the head of the company, Jorge Pareja Yannuzzelli flee the country. Yannuzzelli and his fellows stand accused of receiving bribes in exchange for Petroecuador state contracts and concealing large amounts of money in offshore accounts. Investigators have alluded that this corruption scandal is merely the tip of the iceberg when it comes to corruption in Petroecuador. Both Petroecuador and Petroamazonas have been hit hard by the low price of oil. Some observers estimate they may be receiving as little at $20 per barrel. This fall in revenue is hitting Ecuador’s economy hard and Moreno will be under pressure to stimulate the contracting economy.

Whilst Lasso ran on an economic platform based on austerity and tax cuts, Moreno promised an increase in public spending once again. Yet his plan comes at a time when oil prices are worryingly low and their resurgence is uncertain. Therefore, he has two funding options for his spending plans, raise taxes or issue debt. Tax increases will be politically dangerous as they are unpopular amongst the people. As Lenín Moreno won by a majority of just 2% and lacks a clear support base it is likely he will choose the debt issuance route. This decision would be consistent with Correa’s previous debt issuances that led to the country’s debt to GDP ratio to double from 19.2% in 2010 to 39.6% in only 6 years.

Rating agencies have warned investors about the risks of investing in Ecuador given its poor economic outlook and increasing levels of debt. S&P downgraded Ecuador’s Sovereign Debt from B to B- in June 2017 while Fitch has a negative outlook on its B rating, reinforcing investor sentiment that Ecuador’s debt is not a safe asset. Ecuador has received funds from many different sources including the IMF but a large amount is being issued by China. So much so that the government has been accused of “mortgaging” Ecuador to China. It is likely that Lenín Moreno will focus on short term gains in order to fulfil his campaign promises, while simultaneously increasing Ecuador’s debt. By doing so, Moreno puts Ecuador in a precarious situation edging the country closer to the default cliff. This would only serve to worsen the country’s fragile economic and political landscape.

A social services program at risk of collapse

It is not just Ecuador’s economy that is built on increasingly unstable foundations. Its social services are facing a future as uncertain as its economy. During Correa’s presidency, spending greatly improved Ecuador’s state education system, its health care, and its social security programs.

Not only were they more closely pulled under government management but they were also given huge sums of money made available by oil revenue. These improvements to public services were Correa’s greatest legacy and were seen to alleviate some of the more negative aspects of his presidency. Lenín Moreno’s voters will expect this legacy to be continued. If Moreno does not keep up with the spending levels of Correa’s administration, healthcare, education and other social benefits will see a rapid reduction in quality and coverage.

The situation is politically complex. On one hand, Ecuador’s citizens have become used to a high level of social assistance and will expect this to continue. On the other hand, low oil prices, economic stagnation, high levels of low-quality debt, as well as limited monetary policy tools (which can be a curse when looking for short term stimulus) will make it very tricky for Moreno to please left-wing voters.

Independence from Correa

Much of the uncertainty surrounding Lenín Moreno’s presidency stems from whether Moreno will be independent of Correa or whether we will simply witness a continuation of Correa’s rule by default. Criticism of Correa should not be understated. His communication laws stifled opposition in the media with large fines issued to those who did not support his presidency. While his retention of power for a decade, was contingent on several revisions to Ecuador’s constitution.

Conversely, Moreno’s platform was one of moderation. It promised a softer left that would continue Correa’s legacy without such a domineering style. However, it is looking increasingly likely that Moreno may not have the option of moderation. Ecuador is all the more marred by political divisions and the contestation of the election results will do nothing but deepen them. Protests from Lasso voters have already erupted in opposition to his victory. Should he then fail to stimulate growth and increase employment levels, it is likely that he would lose the 2% margin that granted him power. In the face of opposition, it is probable that Moreno will turn to Correa’s traditional support base in the radical left wing for support. To do so he would have to abandon his moderate platform and take up a more hardline position reminiscent of Correa.

Lenín Moreno and Rafael Correa. (Latin American Post)

In an exclusive interview with PGW, Dr Andrés Mejía Acosta, a Senior Lecturer in Political Economy at King’s College London, stated that Moreno’s ability to deliver a more tolerant and pluralistic government would very much depend on his ability to control, undermine or regulate the influence of Correa’s legislative party, the majority of whom remain loyal to Correa himself. Dr Mejía Acosta concludes that it is most likely Lenín Moreno’s presidency will move Ecuador away from ideologically driven governance. Sooner rather than later we will be likely to see a more pragmatic Moreno, one that seeks to preserve political stability and a level of social well-being while having few economic adjustment options available to him.

This realistic potential for a U-turn on his promises of a soft left means that Ecuador’s democratic institutions cannot take their position for granted even now when Correa is gone. It is essential that Moreno unites Ecuador politically or else his presidency will have disastrous consequences for its democratic institutions.

Will Ecuador become the next Venezuela?

With this discussion of economic decline, debt, and political unrest it is a reasonable question for observers to ask if Ecuador is headed the same way as Venezuela. The answer to this question is that it is highly unlikely that Ecuador will be the next state in South America to fall into the turmoil that has enveloped Maduro’s Venezuela. Indeed, it would be a devastating blow for Maduro’s regime if Ecuador did follow suit as it is a vital ally. Though both the Venezuelan and Ecuadorian economies are reliant on the prices of oil and are being hit badly by their fall, there are a number of differences between the two states that caused one to fall into disarray and will keep the other from following in the footsteps of its ally.

Most importantly is Ecuador’s dollarization (Ecuador has not had its own currency since 2000 when it decided to use the US dollar as their currency). One of the biggest escalating factors for Venezuela’s current crisis is hyperinflation. The savings in the accounts of its citizens were suddenly worth nothing and the Bolivar is almost not worth the paper it is printed on. The government engaged in quantitative easing in order to fund its public spending and make up for the decline in the price of oil. Ecuador’s dollarization, however, took away the power of the government to print its own money. Though this has negatives, mainly the inability to create their own monetary policy, it does protect Ecuador from a currency crisis and hyperinflation as is currently occurring in Venezuela.

Furthermore, Ecuador’s military prides itself on being independent of the regime. It is extremely unlikely that they would act to prop up the government in the way that the military has acted in support of Maduro. A conflict on the scale of Venezuela would simply not be viable in Ecuador.

Ultimately, Ecuador is not Venezuela but Moreno is inheriting a government staring down a multitude of troubles. He must act quickly to devise his economic policy in the face of dismal oil prices. If he acts for the short-term, Ecuador’s current status will continue for a time but will inevitably be in an even worse state when reality sets in. If, though this option is much less likely, he chooses to look towards the long term it is likely then that Ecuador’s democratic institutions could be put at risk. Though Ecuador’s problems largely stem from one very important question, the economy, there is much more at stake. Ecuador’s future lies in the decisions of Lenín Moreno, but looking strong in the short term often foretells a sharp decline.

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