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Hot spots: Ecuador. (International Insight).

Rather predictably after his strong showing in the first round of the presidential elections on October 20, the cashiered Army colonel and avowed banner bearer for the poor, Lucio Edwin Gutierrez, had no difficulty winning the run-off on November 24. He wound up with about 54 percent of the ballots cast, against his opponent Alvaro Noboa's 46 percent (no relation of the incumbent President Gustavo Noboa), and will take office on January 15. He emerged triumphant in large part because, during the course of his campaign, he moved the party he created, the January 21 Patriotic Society (reminiscent of the putsch in which he participated to overthrow the government of President Mahuad in 2000), more and more to the center of the economic policy spectrum.

He has been benefiting from the notion among local and international investors that the economic reality prevailing in Ecuador today will leave him no room for far-left experiments. He has been strengthening this notion by reassuring all and sundry that his government will preserve the greenback as the dollarized economy's principal legal tender, that the country will service its local and foreign debt under his stewardship, and that he will work with the outgoing administration of Pres. Gustavo Noboa to start negotiations with the International Monetary Fund.

Ecuador urgently needs a new agreement with the IMF, a pact that the Washington organization has not wanted to sign with the departing Noboa, mainly because of the latter's refusal (and political inability) to accept the fiscal belt-tightening and other austerity measures demanded by the Fund. Additional oil revenues from a new pipeline under construction will not start flowing into government coffers until late next year, and the country will need help in paying some USD 2 billion in foreign debt principal (USD 750 million) and interest in 2003. While an IMF stand-by or other accommodation would provide only a fraction of the needed amount, it would be instrumental in allowing Quito to tap credits from a variety of other sources.

Gutierrez was so successful in convincing his audiences of investors and financiers on a pre-election trip to New York and Washington of his determination to push for punctilious foreign debt service, balanced budgets, legal reforms, and measures to attract venture capital, that the price of the government's 2030 global bonds, which serves as one of the yardsticks of country risk and had plunged by 13 percent after the candidate's first-round victory, rebounded by 26 percent. At home, his success was in large part attributable to a phenomenon that currently sweeps virtually all of Latin America, namely broad popular discontent with the corruption, the nepotism, the influence peddling and the special-interest-favoring attitudes of the traditional political parties.

Tempting though it is to take Mr. Gutierrez' pro-IMF, pro-reform and pro-business pronouncements at face value, one should not lose sight of the fact that--although politically inexperienced--he is a highly intelligent man who has a keen sense for what his audiences like to hear. He has, after all, railed frequently against any intervention in Ecuador by "foreign powers" or international groups and has repeatedly called for the rejection of "neoliberal globalization." He has insisted that Ecuador is in no position to compete with its neighbors and, therefore, entering a Free Trade Area of the Americas would be "suicidal" for it.

He has in the past said that Ecuador should "reconsider" using the dollar as its currency and fully servicing its external debt. He has never made much of a secret Out of his admiration for Venezuela's leftist/populist President Hugo Chavez, and likes to cast himself as a patriot and corruption fighter who will focus primarily on the needs of the nation's poor--even by official estimates 60 percent of the population. He has been receiving strong support from the local indigenous-rights activists, the labor unions and Marxist groups. Considering the diverse farces to whose backing he owes his election, one must wonder how coherent the incoming Cabinet and, above all, his economic team will be.

He tends to be a consensus-seeker and his style is not nearly as abrasive and authoritarian as that of Venezuela's Chavez (another military putschist-turned-politician). But he needs to worry how he will be able to square the expectations that his election promises have generated in the impoverished populace with the course he will have to take in order to persuade the IMF to open its purse strings and give Ecuador its seal of good housekeeping. On the stump, he ruled out tough austerity measures and promised his supporters cheap housing and free health care. He says even now that he opposes the steep hikes in fuel prices and other fiscal stabilization moves the IMF is demanding.

He concedes quite candidly to be worried how he'll be able "to reach a satisfactory agreement for Ecuador with the International Monetary Fund which doesn't spark a social explosion." If he proves unable to satisfy the IMF, as the outgoing administration has been, Ecuador could quickly slip into a financial crisis. If he agrees to socially unpopular measures, he risks alienating his poor, Indian constituency and, ultimately, losing political power. Steering a safe middle course between these dangers will be a challenge to behold. So, while we would like to be unqualifiedly optimistic about his chances for success, we find in advisable to withhold judgment, at least until meaningful negotiations with the IMF are under way.

Given the many economic and political uncertainties one might be tempted to regard Ecuador as strictly letter-of-credit territory. In fact, though, many companies continue to deal with Ecuador on open account and are doing so with good success. While many smaller Ecuadorian importers remain unable to open L/Cs, in dealing with those who can, one finds that, under certain conditions, U.S. banks have windows open to confirm them. Credit lines in most instances remain reduced, however. Local currency liquidity remains tight and customer requests for moratoria or debt rescheduling deals are still cropping up.

Dr. Belcsak is president of S.J. Rundt & Associates, Inc. Telephone: 973/783-5206; fax 973/744-3073; e-mail:; web site:
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Author:Belcsak, Hans P.
Publication:Business Credit
Geographic Code:3ECUD
Date:Jan 1, 2003
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