Reality traps Correa

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caricatura Chamorro

Cartoon: Marcelo Chamorro

Rafael Correa struck us as invulnerable. A huge layer of Teflon, based on his popularity, seemed to guarantee his political survival beyond anything: his broadsides.  His volte-face regarding former allies. His statist 70’s vision of economic management. His insignificant concern for democracy …

That Teflon was produced under the shade cast by an oil barrel that bordered US$100. With that manna from heaven, the Ecuadorian president and his followers refused to question the political and economic sustainability of their model. Or the consequences of expanding the mass of civil servants -around 120,000 or more -, ceasing savings funds, allowing subsidies to proliferate rather than targeting them, turning the State into the only engine of the economy and hindering the work of the private sector, dragging their feet when facing their best trading partners – the United States and Europe – and instead rolling out the red carpet to investments and onerous loans from China … The oil boom allowed the government to spend without restraint, create and entertain a political-electoral base that is satisfied by public works – roads especially – but in a high percentage oblivious to the concentration of power and the violations of human rights. All those dollars helped the official propagandists make Correa into a supreme savior and an unfailing administrator who was even willing to give lessons to Greece and other troubled countries.

Now with oil below US$50, “Correísmo” has been forced to rejoin the real world.  The belly-flop has been colossal: the financing shortages for the 2015 budget amount to between 12,000 and 13,000 million US$, according to Abelardo Pachano, former president of Produbanco, and Mauricio Pozo, former minister of economy. That is, almost a third of the total budget initially anticipated.

It is the first time in his eight years in power that Correa has to face such an adverse and decisive factor. And the political signals emanating from the government show that they have decided, for now, to sugarcoat the truth to their fellow countrymen. The signals have gone in three directions.

  1. Make a clean sweep of the political arena:The president was quick to characterize 2015 as a “tough, difficult year”. It is a way of pulling the rug out from under the feet of those –analysts or politicians – who see the hole in the budget as the forced landing of an unfeasible model. Correa maintains it is a bump that will only last until 2016. And so that the electorate is not tempted to change lanes, the government has focused on discrediting, even with national chain broadcasts, those who argue the opposite.
  2. Set boundaries to the problem: In its discourse the government has reduced the size of the field and played down the problem. Correa has said that the greatest danger is in the external sector. This enables him and his government to present the fiscal gap as a matter of accountancy that can be remedied by postponing some public works projects, getting loans and inviting external or local entrepreneurs to invest. In short, a temporary problem that, in their eyes, does not reflect the end of a period of prosperity and the beginning of a cycle of resource scarcity
  3. Show that he has control over the situation:this explains Rafael Correa’s trip to China in early January. It was presented as a success, despite the little information given about the real content of the agreements and their implementation over time. Internally the messages all lead to the same point: this is a bump and the government knows what needs to be done and is doing it.

Does Correa have any leeway? Yes, because he controls every institution and he has a legal arsenal that he has been tailoring to fit his aspirations. However, he has a problem: time. He needs money immediately because the new Chinese credit line and the announced budget cuts – US$ 1,420 million – are far from closing the fiscal gap for this year. An external crisis (deficit in the trade balance) and a possible financial problem are added.

What can he do apart from cuts and raising some tariffs without touching the foundations of his model? Analysts who have been consulted mention possibilities and fears. Among the former: more cuts, more taxes and more tariffs… Among the latter: using the liquidity of private banks, introducing electronic money beyond the limits announced by the authorities (inorganic issue), installing a dual currency system…

The fact is that Ecuador will have to adjust to the new economic realities. And this will not happen without political cost for the president who has his sights set on 2017. The huge unexpected fiscal gap is a time bomb in his path to reelection with which his assembly members must deal. This despite the fact that according to surveys two thirds of the electorate want indefinite reelection to be put to the vote in a referendum.

With nothing new to offer, as a result of adverse economic conditions, Correa has entered an area of ​​political wear and tear that he had been able to avoid until now. It is not clear how he will distribute the “joint efforts” to which he has referred in order to address the end of the oil boom. Whether they are called adjustments or cuts, these measures outline a socially tense year in Ecuador. The agreements with China, for example, include the exploitation of strategic resources (oil, minerals…) found in areas inhabited by indigenous peoples, former allies of the regime, but currently openly opposed to its policies. Another example: the temptation to widen the range of taxes exists. If it taxes businesses, the government would challenge its wish to approach this sector; an indispensable actor now it has lost the financial muscle needed to continue being the engine of the economy.

Its political leeway, therefore, currently feels narrow. The indigenous peoples and the organized social sectors fear that Correa will harden his positions and they do not rule out further repression and the use of force. The ball is in the president’s court and he was surprised to see an unexpected player entering the political game: oil, which lavished on him so many dollars and so much popularity, has become the element that this year threatens, directly and irremediably, his invulnerability.

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