Lenin’s New Economic Policy for Ecuador

June 16, 2018

The World Bank recently downgraded Ecuador’s growth forecast, with the economy expected to expand just 0.9% in 2020. But president, Lenín Moreno, has announced a new economic plan, vowing to bring down the country’s fiscal and public debt, while simultaneously attracting foreign investment and maintaining current tax rates. Is it too good to be true?

When Moreno assumed the presidency from former-President Rafael Correa in May 2017, the overwhelming sentiment among investors was disappointment. Moreno was Correa’s chosen successor and represented continuity of a regime that presided over a decade of erratic policymaking, measures that increased executive influence of all government entities and significant corruption.

He has gone to great lengths to distance himself from his predecessor…

Fast forward to almost one year later and Moreno has proven to be a pleasant surprise for investors, his supporters and the opposition alike. He has gone to great lengths to distance himself from his predecessor, undoing much of the draconian legislation that came into effect during Correa’s decade in office and attempting to unite the polarised country with more centrist measures. He continues to expose the depth of corruption under the previous administration, with his anti-corruption campaign reaching the highest political levels. To date, a vice-president and former head of Congress have been among the victims of his no-holds-barred integrity drive. While it could be argued that this push has conveniently helped Moreno to oust his critics and gain popularity, others state that he is simply determined to fix Ecuador’s issues.

Either way, his strategy has played off, and his approval ratings have not dropped below 60% since he came to office.

This is no mean feat for a president in a region where approval rates tend to hover around the late teens/early twenties in a good month. While his ratings have dropped slightly in previous weeks, Moreno has not had the time nor the inclination to stop and panic about this, and he remains focused on implementing broad change, even if this causes pockets of disquiet in Ecuadorian society.

Lenin’s new economic policy

Nowhere has this resolve been more evident in recent weeks than in the economy, and the plan recently presented by Moreno is yet another example of his desire to break with the past. Composed of 14 measures under four umbrella themes, the plan aims to stem the economic crisis and seeks to reduce the fiscal deficit from almost 6% to 2.5% by 2021. More importantly, it demonstrates Moreno’s genuine desire to improve Ecuador’s economic situation and the need to make significant changes. This, combined with his less than subtle insinuations of the previous regime’s responsibility for the situation he inherited, will likely convince the majority of the population, even if it involves some austerity.

Announcing the plan during an address to citizens, Moreno repeatedly stated that he would not increase tax rates but would instead improve collection measures in order to raise much-needed revenues. The four objectives are increasing efficiency in tax collection, implementing institutional austerity, developing equilibrium externally and improving private sector participation – each of the 14 measures corresponds to one or more of these themes. The measures are broad and cover a full spectrum of economic cuts and changes – from reducing the bureaucracy, to closing certain state-owned companies, to improving public-private partnerships (PPP) opportunities and improving worker contracts.

During his speech announcing the plan, Moreno stated that it was time for Ecuador to open up to outside investors. Specifically, Moreno spoke of the importance of attracting foreign investors through public private partnerships PPPs which he hopes will be worth $7bn between 2018 and 2021 across telecommunications, infrastructure and the extractive industries.

However, the miners and energy firms have mixed feelings about Moreno, following a February referendum, where two of the seven questions that the government campaigned for restricted extractive industries. For example, oil drilling will be prohibited in parts of Yasuni National Park, reducing the authorised area for extraction to 300 hectares from more than 1,000. Mining will also be prohibited in urban or protected areas.

The new economic plan also proposes a number of measures aimed at streamlining the bureaucratic environment, in recognition of the bloated state apparatus and unnecessary paperwork that companies have to deal with in order to operate. The decision to close seven of 22 public companies before 2020 is a bold one, as it admits the weakness of these institutions. Moreno’s careful criticism of the state will be encouraging to investors. For example, under the new plan all procedures required by companies must be justified by the appropriate government body within 180 days, and those which are not perceived to be 100% necessary will be scrapped; a sensible policy which should appeal to companies.

What’s the impact for business?

One of the other biggest positives of the plan is the fact that as well as emphasising that there would be no tax increases, Moreno also vowed to make the tax collection process more efficient. This will facilitate businesses that find the current tax payment system complex and paperwork-heavy. While this is a positive sign, it does however come with a warning. Businesses should be aware that although the process will be simplified, companies perceived to be evading taxes will come under scrutiny and could suffer related reputational damage as the government seeks to make examples of tax evaders.

It is not all good news, however, as some of the measures of the economic plan are less beneficial to companies. One less welcome development is the plan to raise customs tariffs, though no specifics have been stated as to how or when this will occur.  Furthermore, planned changes to worker contracts are likely to increase costs for employers, and will empower workforces to seek benefits as the government is perceived to be “on their side”.

It is not all good news, however, as some of the measures of the economic plan are less beneficial to companies…

More broadly, problems are not necessarily contained within the measures themselves, but in the way in which they are likely to be implemented. That is, while some of the measures are relatively concrete, for example, the closure of seven state companies to streamline government infrastructure and the reduction of bureaucratic processes, they lack timeframes or specifics as to how the ambitious goals are going to be achieved. Other measures are vaguer, and their full implementation is likely to be delayed even further. For businesses, this means that no major changes can be expected overnight and teething problems are likely. For example, the laudable efforts to improve the tax payment system, or reduce paperwork, are unlikely to fully come into effect in 2018.

Furthermore, if Moreno’s approval rates continue declining it is not unfeasible that he backtracks on the more controversial measures, if he believes that doing so will win over the support of the population. While there has been no major outcry over the measures to date, this is something for investors to watch out for, as it may determine the speed of reform or change.

In all, the plan contains positives and negatives for investors. It will be difficult to implement some of the more beneficial plans, just as the government will not lose its populist rhetoric overnight. However, the plan represents more than just a number of measures to improve the overall economy, but the recognition by the government that it must do more to win over the confidence of investors whose image of Ecuador has been shattered in recent years by Correa’s approach to investment. It is this recognition, not just in the economic sphere but in other areas, that will make Ecuador an extremely interesting destination for companies in the coming years.