|Classification Codes:||9173: Latin America
1120: Economic policy & planning
1300: International trade & foreign investment
Ecuador's populist new president, Abdala Bucaram, came to power on a wave of dissatisfaction with the status quo. He has already developed a reputation for eccentricity, not least for economic policies that threaten to alienate the international community. There is also worrying evidence of cronyism and an authoritarian approach to foreign investors. Ecuador is about $200 million in arrears to the Paris Club, representing governments of industrialized nations, and wants to renegotiate the terms of its Paris Club debt to ease the country's overall debt burden. To bolster its international credibility, the government must also reach a standby credit agreement with the IMF, which will require it to achieve and maintain a balanced budget by increasing tax revenues and rationalizing spending. This will make it difficult for Bucaram to fulfill his lavish campaign promises, which included increasing education spending and building 200,000 units of low-income housing. But he may be able to avoid tough choices by accelerating Ecuador's privatization program.
Copyright Euromoney Publications PLC Dec 1996
|Ecuador's populist new president came to power on a wave of dissatisfaction with the status quo. He has already developed a reputation for eccentricity, not least for economic policies that threaten to alienate the international community. There is also worrying evidence of cronyism and an authoritarian approach to foreign investors. By Norman Peagam|
During his first 100 days as president of Ecuador, Abdala Bucaram shaved off his moustache to raise money for charity, staged a concert to perform songs from his forthcoming album, "A Crazy Man In Love", and hosted a lunch at the presidential palace for Lorena Bobbitt, an Ecuadorean best known for cutting off her American husband's penis. A tireless self-promoter, the 44-year-old Bucaram also gave his monthly salary to poor people and arranged for the distribution of subsidized milk to the needy, in plastic cartons bearing his picture and the brand-name Abdalact. To those who suggest he might spend more time on government business, he retorts: "I do as I damn well please."
Bucaram was the surprise winner of Ecuador's presidential election this year. An unabashed populist who promised to champion the poor and hound the elite, he took office on August Io and has continued his strident rhetoric since. But behind the combative language and grandstanding, advisers say he has a serious purpose. He thinks Ecuador lacked strong leadership in the past and needs shaking up. Like presidents Carlos Menem in Argentina and Alberto Fujimori in Peru - also ethnic minority outsiders - they say Bucaram plans far-reaching political and economic reforms that could enhance Ecuador's prospects for growth and stability.
"Bucaram wants to change the country," says Jose Mantilla, adviser to central bank general manager Augusto de le Torre. "He wants to go down in history as the best president that Ecuador ever had. He wants to be known throughout the world not as the new Menem, but as what Menem could have been.
He aspires to grandeur." As a result, says Mantilla, he will propose "probably the most significant transformation of Ecuador's economic institutions since the I920S, when most of them were created".
First, Bucaram hopes to change the constitution so he can run for re-election in 2000 and lead the country into the 2Ist century. He also wants to give the judiciary greater autonomy; at present the courts are an appendage of congress, with judges appointed on a political basis. In addition, he would make the central bank and monetary board more independent, create a new framework for implementing fiscal policy and abolish so-called strategic industries, opening them up to private-sector investment. Despite his populist image, advisers say he may also embrace orthodox recommendations by the World Bank to reduce subsidies, tax evasion, tax exemptions, free university education and heavy government regulation of the labour market, since these distortions actually benefit the well-off at the expense of the poor.
Most controversially, Bucaram wants to adopt the so-called convertibility plan which ended hyperinflation in Argentina by legislating a fixed exchange rate and a requirement for the monetary base to be fully backed by international reserves. He has even recruited former Argentine finance minister Domingo Cavallo as a part-time adviser (with the multilateral development agency Corporacion Andina de Fomento footing the bill). The fact that Ecuador has traditionally enjoyed relative monetary stability, unlike Argentina and most of Latin America, has not dimmed his enthusiasm; Bucaram seems convinced that parity with the us dollar is the best way to reduce inflation and interest rates.
Many economists and business people even some of Bucaram's ministers - disagree, arguing that parity is unnecessary and could be harmful. As a small, open economy dependent on a few products and vulnerable to external shocks, they say, Ecuador should retain fiscal and monetary flexibility rather than imposing a straitjacket on itself. While parity might benefit importers, who happen to be among Bucaram's biggest supporters, opponents say it could hurt exports and the economy in general, especially if the government cannot maintain a balanced budget. "If you don't have credibility, the convertibility plan could be a time-bomb, both economically and socially," says Alfredo Gallegos, president of the American Chamber of Commerce in Quito. "That's what people fear."
Bucaram's many critics are deeply sceptical about his economic reform plans, not least because he had failed to announce details of the programme as of late November, missing repeated deadlines. Although taking some comfort from the fact that he has broadly followed the economic policies of his predecessor, they point to some disturbing trends since the new administration came to power; Bucaram has surrounded himself with friends and relatives, raising questions of nepotism and conflict of interest, and has appeared to condone strong-arm tactics in dealings with business people, including foreign investors.
In view of the prevailing uncertainty, bankers say investment is stagnating and money leaving the country. The sluggish economy is unlikely to revive soon, although high oil prices are helping to contain the government's budget deficit. Nevertheless, Ecuador's dollar-denominated Brady bonds have been stellar performers in the international secondary market this year, gaining more than 55% in value as emerging-market investors have reached for the highest spreads available in Latin America. In addition, despite the fact that Ecuador is in arrears on some of its external debt, foreign banks have been trying to organize a $300 million trade facility for Petroecuador, the state oil company, and government officials say Chase Manhattan Bank will soon launch a $300 million-$400 million Eurobond offering on behalf of the republic. (Chase declines to comment.)
Ecuador is one of the poorest countries in South America, with a I995 per capita GDP of about $I,500 and a highly uneven distribution of wealth. More than a third of its II.S million people live in poverty and nearly half its children under five suffer from malnutrition. The indigenous Indian population is especially disadvantaged, while a wealthy, largely European elite has traditionally run the country, mainly for its own benefit. The leading population centres are Quito, the capital, in the mountains of the Sierra and the port of Guayaquil on the Pacific coast. Ecuador earns $3 billion to $4 billion a year from exports, with oil shipments accounting for over a third of the total, followed by bananas, shrimps, coffee and cocoa.
A latecomer to industrialization in the I96os, Ecuador embraced the conventional wisdom of the day, pursuing import-substitution policies and state intervention. The discovery of oil in I967 led to a boom when oil prices soared, enticing foreign banks to lend the country large amounts. But the collapse of oil prices in the I98os and Ecuador's failure to adjust left it unable to repay its foreign debt, not for the first time. In 1992, the government of president Sixto Duran Ballen began to implement orthodox economic reforms and in early I995 successfully completed a Brady Plan debt restructuring which normalized relations with foreign creditors. But forward momentum was then lost because of a border conflict with Peru, power shortages and a political crisis in which the country's vice-president resigned and fled to Costa Rica after being accused of corruption.
Success by no means assured
In this years election campaign, Bucaram was able to ride a wave of dissatisfaction with the status quo among voters, and his reform programme may appeal to their desire for change - especially if, as expected, it is accompanied by increased social spending. But its success is by no means assured. First, his proposals will almost certainly require major constitutional and other legal changes, which may not be easy to achieve; much will depend on Bucaram's buying power in congress, where his party occupies 19 of the 82 seats. As a recent commentary by brokerage firm Investunion points out, "As long as [his party] can exchange votes for money or positions of power, it will receive the backing of deputies from other political parties." Second, there is reason to doubt the depth of Bucaram's commitment to reform, because he has already backtracked on several issues and given wildly conflicting signals.
For example, he has spoken out clearly in favour of foreign investment. But his government arrested officials of two European import-verification companies and held them in jail without due process, alleging underreporting of imports; after a couple of weeks, it had to release them for lack of evidence. Bucaram himself ordered the country's largest cement company, a private-sector joint venture with Holderbank of Switzerland, to close because it raised prices, although the order was rescinded at the last minute. And his minister of energy threatened to send in the military to shut down the drilling operations of a Latin American oil company unless it agreed to renegotiate its contract with the government.
"These are basically strong-arm tactics, intimidation tactics; `Agree to our terms by the end of the day or we'll expropriate you'," says a foreign businessman in Quito. Noting that foreign investors value contract inviolability above almost everything else, he says, "Certainly these tactics call contract sanctity into question." But, he adds, while "there is a fair degree of political risk here right now... I think cooler heads will prevail in the end."
Some critics question whether the government is capable of carrying out the reforms. For one thing, the new administration appears to be in some disarray, partly because Bucaram insists on making all decisions himself while keeping no set work schedule and flying around the country. "It's a total madhouse," a former official tells friends. "This man is so totally disorganized and so totally unpredictable, it's almost impossible to function." In addition, there is widespread concern that he does not have the right people around him (with the notable exception of central bank general manager de la Torre, held over from the previous administration). Symbolizing the problem, his minister of education stands accused of plagiarism for writing a book which bears remarkable similarities to somebody else's unpublished thesis; excoriated by Ecuador's freewheeling press, she has so far refused to resign.
But the problem goes much deeper. When he took office, Bucaram fired many government workers and replaced them with political appointees. For instance, he reportedly dismissed 400 of the 6oo employees at Banco del Estado, the state development bank, and all zoo personnel at the drug-control agency, filling the vacancies with his own people. A sports fanatic who still has the energy to play soccer and basketball, he even gave some positions to his soccer friends. "From ministers down, all are basically political appointees with no prior government experience and often little or no education," says a senior official who survived the purge.
Bucaram himself is a lawyer by training and a descendant of Lebanese immigrants who moved to Guayaquil earlier this century; arriving from the Ottoman empire on Turkish passports, they were labelled "turcos" and the derogatory term is still used. While others in the city's Lebanese community were making money in business - typically as importers who, by all accounts, often under-reported the value of what they were importing - Bucaram became a professional politician, funded by them. He lived off contributions, ran repeatedly for office, won election as mayor of Guayaquil and became wealthy. However, he twice spent periods of exile in Panama, once after denigrating the military and once after being accused of embezzlement as mayor. (His sister, Elsa, later served as mayor of Guayaquil; she also fled to Panama after being accused of pocketing city funds. The supreme court recently dismissed these charges.)
Bucaram's inner circle consists of friends from the Lebanese business community in Guayaquil. Each has been placed in a key position. They include Miguel Salem, his chief of staff; Omar Quintana, in charge of privatization, and minister of energy Alfredo Adum. Given the large amounts that could be raised through privatization, Quintana's appointment raised eyebrows because he was once convicted of illegal business practices. A major importer, Adum is a long-time supporter who reportedly underwrote Bucaram's sojourns in Panama. Newspaper accounts of his behaviour in office have evoked widespread criticism; in addition to intemperate language and loudly refusing to hand over his gun to airport security personnel, Adum has been accused of striking a female employee in the face and holding a gun to the head of another employee. He denies the charges.
Alongside these friends, Bucaram has called on relatives to fill some positions. His brother Adolfo is minister of social welfare; his brother-in-law, Pablo Concha, is minister of finance, and his sister Elsa, recently returned from Panama, is said to be a presidential adviser. In the congress, a second brother is vice-president of the budget commission and a third brother is vice-president of the economic commission and the new head of Ecuador's Olympic Comittee.
Bucaram has also named three Guayaquil bankers to senior jobs, although it is unclear whether they wield much influence. Roberto Isaias is chief economic adviser; of Lebanese descent, he and his family control Filanbanco, the country's largest bank (and one of its least profitable). Alvaro Noboa is chairman of the monetary board; a son of the late Luis Noboa, Ecuador's bananas and shipping tycoon, he has not displayed his father's business talents and headed the small Banco Litoral until recently. And David Goldbaum is president of the Corporacion Financiera Nacional, a development agency; he and his family own Banco Territorial.
Some of Bucaram's appointments pose huge conflict-of-interest problems. For example Adum's principal assistant at the energy ministry is Maria Fernanda Penafiel; her family owns Tripetrol, Ecuador's leading private oil company. Isaias is privy to pending legislation governing banks, even though his family owns a major bank. He also has a stake in the cable Tv monopoly, which has built a fibre-optic network across the country and could be a major beneficiary of telecom privatization. In a possible sign of things to come, Petroecuador recently cancelled its existing insurance policies, giving the business to companies controlled by Roberto Isaias, David Goldbaum and their families. Bucaram himself sets the tone. He apparently loathes the capital, Quito, and rarely visits it. When he does so, he shuns the presidential palace and prefers to stay at the privately owned Hotel Colon, which provides him with free accomodation. But, as a banker in Quito remarks, "If he's not paying, who is paying and what is he getting in return?" There have been other straws in the wind. After taking office, Bucaram flew his obese son to Miami for medical treatment at government expense. When his son was jeered by other patrons at a nightclub, the club was ordered to close. As mayor of Guayaquil, Bucaram is said to have harassed and intimidated people who got in his way. In a country with chronically weak institutions, some observers fear there has been abuse of power. Investunion, a subsidiary of Banco Union, warns of "emerging signs of intolerance and authoritarianism".
On the economic front, however, Bucaram's room for manoeuvre is limited, unless he wants to sever relations with the international financial community. Ecuador is about $zoo million in arrears to the Paris Club, representing governments of industrialized nations, and wants to renegotiate the terms of its Paris Club debt to ease the country's overall debt burden. (Total external debt service this year will consume about 37% of projected budget revenues.) To bolster its international credibility, the government must also reach a standby credit agreement with the IMF, which will require it to achieve and maintain a balanced budget by increasing tax revenues and rationalizing spending. This will make it difficult for Bucaram to fulfil his lavish campaign promises, which included increasing education spending and building zoo,ooo units of low-income housing.
But he may be able to avoid tough choices by accelerating Ecuador's privatization programme. Currently, the government is planning to sell 35% of the national telephone company to an international operator in April for perhaps $700 million-$goo million and to invite private-sector participation in electricity generation and distribution. The government is also in the process of converting the risk service contracts of foreign oil companies into participation contracts, which will provide it with a guaranteed stream of income from producing oilfields.
However, until the new government begins to chart its own course and make decisions, the country's prospects remain highly uncertain, given Bucaram's populist inclinations and his current popularity among low-income voters. "It's a very confusing situation; the parameters aren't clear by any means, the jury's still out," says a foreign banker in Quito. "Ecuador is now at a crossroads," adds Jose Mantilla, the central bank adviser. "Decisions made over the next few months will probably determine what Ecuador will be like over the next 40-50 years and whether it will realize its development potential, which is pretty big, or whether it will stay an economic backwater, a forgotten country."
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