Bloomberg News

Correa Poised for Re-Election in Ecuador on Oil-Backed Spending

February 15, 2013

Rafael Correa, Ecuador’s first elected president since 1996 to finish his term, is poised to win re-election Feb. 17 as voters reward him for using the OPEC nation’s oil wealth to boost spending on social welfare.

The former economics professor was running ahead of the opposition with 62 percent of those surveyed saying they planned to re-elect him, according to a Feb. 5 poll, after pledging to “radicalize” his “citizens’ revolution” with free education and health care.

As the head of a nation where about one in three of its 15.4 million citizens live in poverty, Correa defaulted on $3.2 billion of bonds in 2008 and pushed through laws nationalizing the country’s oil reserves during his first two terms in office. While the moves provided short-term gains, the 49-year-old Correa, an ally of Venezuela’s Hugo Chavez, is now paying the cost with stagnant crude output and declines in private investment needed to boost slumping growth.

Correa’s “weakness will be trying to keep promises in a time of less funding,” former Finance Minister Fausto Ortiz, who worked with Correa in 2007-2008, said in a phone interview from Quito. Whoever wins “will need to approach the private sector and foreign investors to be able to substitute financing that’s no longer available from oil.”

First-Round

Correa, who’s vying with seven other candidates for a four- year term as the Andean country’s president, needs at least half the valid votes cast or 40 percent of the vote plus a 10 percentage-point lead over the second-place candidate to be elected in the first round.

If no candidate receives the requisite number of votes, a second-round election will be held April 7 between the top two candidates. The National Electoral Council will publish partial voting results after polls close around 5 p.m. local time Feb. 17.

A Feb. 5 survey by Quito-based pollster Perfiles de Opinion, the last poll published before the elections, shows Correa leading with the support of 62 percent of those surveyed. Guillermo Lasso, the former chief executive officer of Ecuador’s second-biggest publicly-traded bank, Banco de Guayaquil SA, trailed Correa in second place with 9.2 percent support.

The survey of 8,050 people had a margin of error of 1 percentage point. Six other polls found Correa leading with support ranging from 48 percent to 59 percent.

Before Correa, Ecuador saw three elected presidents fail to complete their terms. Abdala Bucaram, who adopted the nickname “El Loco” or “Madman” while in power, was voted out of office by Congress in 1997 after being declared mentally unfit to rule.

Predecessors, ‘Authenticity’

Jamil Mahuad, a Harvard University professor who led Ecuador’s 1999 default and presided over the collapse of the nation’s financial system, stepped down after street protests and a military uprising left him without support in 2000.

Lucio Gutierrez, a candidate in this year’s election, was thrown out by Congress in 2005 after his decision to fill the Supreme Court with allies was met by months of street protests and a military rebellion. The Perfiles survey showed the former president running in third place with 3.8 percent of those polled saying they planned to vote for him.

“The last three governments before the citizens’ revolution were overthrown not because Ecuadoreans are ungovernable, but because they betrayed the people,” Correa said in interview yesterday with state-controlled television station GamaTV. “By saying what we think and doing what we say, it’s this authenticity that gives us immense popular support.”

Neither Correa nor Lasso responded to interview requests.

Congress, President’s Agenda

Ecuadoreans will also vote for a new congress. Correa’s ruling Alianza Pais political party may increase its control of the legislature to between 80 and 100 of the assembly’s 137 seats, Eurasia Group analyst Risa Grais-Targow said in a Feb. 11 research note.

“Correa will likely face few institutional barriers to advancing his agenda during a third term,” Grais-Targow said. “Though the overall direction of policy is unlikely to change, Correa could use his stronger political mandate and likely legislative majority to advance more controversial reforms that he has avoided in the past,” including legal reforms to attract foreign miners, she said.

An increase in the price of oil, tax increases and loans from China have helped Correa more than double spending in the past six years, fueling growth.

China, Commodities

In programs similar to those implemented by Chavez, Correa has used loans from China to rebuild the nation’s crumbling energy infrastructure and expand its hospital system. The government in January boosted monthly cash handouts to the poor by 43 percent.

Home to untapped copper reserves similar to those of Chile and Peru, the world’s top producers, Ecuador has signed loans for $7.3 billion from China since 2009, or about one-third of the Andean country’s annual budget, according to data compiled by Bloomberg based on government announcements.

Ecuador’s economy, South America’s seventh biggest, has grown by an average of 5.2 percent a year since Correa came to power in January 2007, while inflation has averaged 4.8 percent, according to government data.

The central bank forecasts economic growth of 4 percent this year, down from an estimated 4.8 percent in 2012. Inflation will slow to an average 3.8 percent in 2013, less than the 5.1 percent average last year, according to government data.

Ecuador uses the U.S. dollar as its official currency.

Oil, Revenue

The price of oil, which provides the government with about 48 percent of its revenue, has jumped 84 percent to $97.36 a barrel since Correa took office, touching a record $145.29 in July 2008, data compiled by Bloomberg show.

Ecuador holds South America’s third-largest oil reserves and ranks as the Organization of Petroleum Exporting Countries’ smallest producer with an estimated output capacity of 505,000 barrels of crude a day.

While polls show Correa has built support through social spending, New York-based Human Rights Watch has sounded alarms about a deterioration in press freedom, indigenous rights and an increase in judicial corruption under Correa, according to its 2012 annual report.

Laws pushed through congress by the president, like Ecuador’s so-called democracy code, “restrict freedom of expression, and government officials, including Correa, use these laws against his critics,” the organization said.

Democracy Code

The democracy code limits media coverage of political candidates and parties during the run-up to elections, banning journalists from reporting anything “favorable or unfavorable” about contestants or their movements in the 45 days before a vote.

The law has led media outlets to opt for self-censorship to avoid being sued, according Fundamedios, a Quito-based press watchdog.

The Council on Hemispheric Affairs, a regional research group based in Washington, said in December that the government had pushed through an “irregular” voting-law reform, without congressional approval, that weakens the country’s electoral system and restricts freedom of press.

The changes, which divided Correa’s party, “will not contribute to the conduct of free and fair elections,” the council said in a report.

Leadership, Global Stage

“What’s at stake is whether this kind of personalistic, populist leadership will dominate Ecuadorean politics for the foreseeable future,” Cynthia Arnson, director of the Latin American program at the Woodrow Wilson International Center for Scholars, said in a telephone interview.

Correa, an opponent of what he calls U.S. imperialism in Latin America, has also angered U.S. lawmakers by allying himself with Iran’s President Mahmoud Ahmadinejad, expelling President Barack Obama’s ambassador to Quito and granting WikiLeaks founder Julian Assange political asylum at Ecuador’s Embassy in London. Wikileaks has published thousands of classified U.S. cables on Assange’s anti-secrecy website.

If Correa is re-elected, he will need to moderate his policies to attract new investment from local and foreign investors to boost “stagnant” markets, Patricio Pena, the chairman of the Quito securities exchange, said in an interview in Quito.

‘Next Government’

Ecuador, which has South American’s lowest foreign direct investment rate as a percentage of GDP, has seen yields on its $650 million of dollar notes due in 2015, the country’s sole- performing foreign bond, drop 1.04 percentage point to 8.01 percent in the past two months amid a record rally in global high-yield debt.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries has narrowed 116 basis points, or 1.16 percentage point, to 710 basis points this year, according to JPMorgan Chase & Co.’s EMBIG indexes. That compares with a nine basis-point increase for the EMBIG, making Ecuador the third-riskiest economy in South America after Venezuela and Argentina, JPMorgan data show.

“We’ve been immobilized in an environment where things should be moving very quickly,” Pena said in an interview during a conference at the Universidad San Francisco. “The next government will necessarily have to move closer to the business sector because the country can’t stay stagnant with the absence of new investment.”

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net.

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net.


We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus