ECUADOR: Correa and the Future of Oil
By Editorial Dept - Feb 22, 2013, 1:09 PM CST
Bottom line: Foreign investment, though crucial for improving oil production levels in Ecuador, will remain far below potential for political reasons.
Analysis: On 17 February 2013, President Rafael Correa (Alianza País) was reelected in the first round of voting with 56.93% of the vote. His party is poised to win a majority in the legislature, providing Correa with plenty of political capital. At the polls, the public demonstrated support for his socialist programs, infrastructure projects, and continued economic growth, which are all funded by oil money. Correa outlined plans to diversify the economy by stimulating the mining sector. Though popular at home (Correa will likely be in office for a full decade 2007-2017), business freedom has decreased during his administration. Further complicating Ecuador’s situation is its limited access to international finance. In 2008, Ecuador defaulted on US$3.2 billion in debt. Combined with renegotiated oil contracts that reduced profits, many investors turned their attention to Colombia and Peru.
Diversifying Ecuador’s economy would be a wise move, but the mining sector is not a silver bullet. To attain strong growth Correa needs to court international investment in both the oil and mining sectors. Oil brings in a dependable cash flow and prices remain near historic highs. If Ecuador can return to its previous, higher levels of oil production it would be an easy guaranteed growth opportunity.
At…
Bottom line: Foreign investment, though crucial for improving oil production levels in Ecuador, will remain far below potential for political reasons.
Analysis: On 17 February 2013, President Rafael Correa (Alianza País) was reelected in the first round of voting with 56.93% of the vote. His party is poised to win a majority in the legislature, providing Correa with plenty of political capital. At the polls, the public demonstrated support for his socialist programs, infrastructure projects, and continued economic growth, which are all funded by oil money. Correa outlined plans to diversify the economy by stimulating the mining sector. Though popular at home (Correa will likely be in office for a full decade 2007-2017), business freedom has decreased during his administration. Further complicating Ecuador’s situation is its limited access to international finance. In 2008, Ecuador defaulted on US$3.2 billion in debt. Combined with renegotiated oil contracts that reduced profits, many investors turned their attention to Colombia and Peru.
Diversifying Ecuador’s economy would be a wise move, but the mining sector is not a silver bullet. To attain strong growth Correa needs to court international investment in both the oil and mining sectors. Oil brings in a dependable cash flow and prices remain near historic highs. If Ecuador can return to its previous, higher levels of oil production it would be an easy guaranteed growth opportunity.
At the moment, sources in the government indicate they see China as an ideal economic partner, with great demand and resources to invest. We expect more Chinese -backed projects akin to the Coca Codo Sinclair hydroelectric station, especially given Correa’s renewable energy plans.
Bringing back “Western” investment may prove difficult for reasons that go beyond the economic crisis. Correa does not want to ratify any free trade agreements and wants to replace the dollar with the sucre (Unitary System for Regional Compensation, used by the Bolivarian Alliance for the Americas - ALBA). This creates obstacles for foreign partners. Shortly after his victory, Correa downplayed Ecuador’s need for foreign investment, which may signal that he is leaning toward other options, like discarding the Yasuní Initiative to auction new drilling concessions in the Amazon.
