World Economy

Ecuador's Rafael Correa pushes for foreign investment

Ecuadorian President Grapples with Low Oil Prices
Ecuadorian President Grapples with Low Oil Prices

The plunge in the price of oil is forcing major changes for the president of Ecuador, Rafael Correa.

After eight years of state spending that was made possible by the commodity boom, the country is being forced to tighten its belt, and Correa is seeking more foreign direct investment. "This is a very difficult year because of the fall in oil prices," Correa said in an interview with CNBC.

But with an unfriendly business environment, Correa may find it hard to entice the private sector to pick up the slack.

Government spending is now 40 percent of GDP, up from less than 20 percent when Correa first came to office in 2007, according to the Heritage Foundation. Even when oil prices were high, the country borrowed money to finance spending. Ecuador's debt-to-GDP ratio rose from 15 percent in 2009 to an estimated 33 percent for 2015 — a number still considered low. Ecuador's economy grew faster than those of most of its Latin American peers during those years.

Opponents demonstrate against the government of Ecuadorean President Rafael Correa in Quito on Sept. 16, 2015.
Rodrigo Buendia | AFP | Getty Images

But the revenue tide has turned. According to Moody's, Ecuador's oil revenues in the first half of the year dropped to $1.1 billion, down 55 percent from a year ago. Ecuador got an average of $49 per barrel from January to August of this year, but the 2015 annual budget was based on an assumption that oil would average $79.90 per barrel. As a result, the country announced $800 million in spending cuts in August on top of $1.4 billion in spending cuts in January — the cuts totaling an equivalent of 2.2 percent of Ecuador's GDP.

Correa rejected suggestions that the country spent too much while oil prices were high. "It's not true. We invested a lot," which is different than "spending a lot," he said. The country has built new highways and is in the process of working on "megaprojects" Correa said, including eight new hydroelectric plants and six irrigation projects.

Correa, a self-described leftist, attributed Ecuador's financial squeeze to "bad luck."

"You can have a good decision, but bad luck," the president said. He argued that if the fall in oil prices had occurred just one year later, the country's financial picture would be better because many of the megaprojects in the country would be finished and producing revenue.

Also tying Correa's hands is Ecuador's dollarized economy. The country no longer has its own currency, instead using the U.S. dollar since 2000. And Correa, an economist with a Ph.D. from University of Illinois at Urbana-Champaign, is well aware that he can't weaken the currency in order to make Ecuador more competitive.

"We don't have a national currency ... (when) you have such a strong external shock, you must depreciate your currency," he said. "But the American dollar is doing the opposite. The American dollar is appreciating."

A woman counts bolivar notes as she pays for vegetables at a street market in Caracas on Oct. 1, 2015.
Food inflation: It’s getting hard for Venezuela to feed itself

In the meantime, he's trying to draw the interest of the private sector. New legislation adopted this summer is designed to help create public-private partnerships. Correa also met with potential contributors of foreign direct investment while he was in New York in September to attend the United Nations General Assembly.

By that measure, the country has nowhere to go but up. In each of the last three years, net FDI amounted to less than $1 billion, according the central bank, which is a small figure for a country with a $94 billion economy.

Ecuador ranks 115th out of 189 countries in the World Bank's annual "Doing Business" index. Transparency International ranks it 110 out of 175 countries in its Corruption Perceptions Index.

The Heritage Foundation's annual index of economic freedom puts Ecuador at No. 25 out of 29 countries in South & Central America, saying the country lags significantly "in promoting rule of law and has yet to establish a judicial system that is free from political interference." In 2014, "the government decriminalized intellectual property rights violations."

Its most important sector, oil, has suffered as a result of what the Energy Information Agency calls "resource nationalism." After coming to power, Correa changed the way it structures agreements with private oil companies, moving Ecuador from production-sharing agreements to service contracts. The EIA says that while that step has increased the government's share of revenue and state oil production, it has "deterred the interest of private sector participants." Overall oil production has been stagnant for 10 years.

A shopping district in Rio de Janeiro
This currency's collapse is astounding: Trader

Correa, first elected in 2007, is in his third term as president, and he wants the National Assembly to change the Ecuadorean Constitution to eliminate term limits completely. The move has raised concerns that he will, like former Venezuelan leader Hugo Chavez, try to stay in office indefinitely.

Correa bristled when asked, "Are you ever going to leave office?"

"Oh, come on," he said. "I don't want to be a candidate next period, next election." When asked specifically if he would stand for re-election, he replied by saying, "usually not," and switched topics to the country's tax code.

This past summer, Correa faced large protests in the capital of Quito. More than 200,000 protesters demonstrated against new tax proposals that would raise the capital gains tax on land sales to 75 percent. Correa told CNBC that the tax is designed to stop "speculation."

According to the Committee for the Protection of Journalists, Ecuador has one of the worst press freedom records in Latin America, with journalists subject to legal measures, defamation suits and other prohibitive measures. Correa dismissed CPJ as an "interest group" that lacks an "objective opinion."