COUNTRY BRIEFING

FROM THE ECONOMIST INTELLIGENCE UNIT

Ecuador’s government has triggered new alarm bells in recent days with the seizure of three media companies—and threats against others—and the subsequent departure of the finance minister. This highlighted anew President Rafael Correa’s leftist policies and reignited worries about a possible debt restructuring. It also signalled the president’s determination to boost his popular support ahead of a referendum on his proposed constitutional reforms.

On June 8th the government took over three TV networks and almost 200 businesses owned by a powerful business group headed by the Isaías family, which is linked to the banking and economic crisis of the 1990s. Brothers Roberto and William Isaías owned Filanbanco, Ecuador’s largest bank, and fled to the US after the bank’s 1998 failure. They are being accused of fraud and of owing US$661m to the state’s Deposit Guarantee Agency (AGD) and to other creditors and depositors. Seizure of the companies, and their eventual sale, is designed to help pay off this debt.

Days later, on July 10th, the government threatened to seize even more companies owned by economic interests implicated in the financial meltdown, during which thousands of Ecuadoreans lost their deposits, the economy nearly collapsed and Ecuador gave up its national currency in favour of the dollar. The constituent assembly, which is government controlled and is acting as a legislature, has ordered an investigation of companies owned by former shareholders of all the nearly failed banks.

The government also has said it might revoke the licenses of many other radio and television stations because of contract irregularities. This has raised concerns about media freedom in the country, and smacks of similar recent takeovers by Venezuela’s radical president, Hugo Chávez, of media outlets that were critical of his government.

Radical tactics

These incidents have fuelled already existing concerns about the Correa administration’s growing interventionist policies and its approach towards Ecuador’s external debt. Finance Minister Fausto Ortiz resigned in response to the takeover of the Isaias companies and was replaced by Wilma Salgada, a leftist known to be unsympathetic to Ecuador’s external creditors.

Mr Correa has lately repeated threats that he would refuse to recognise debt found to be “illegitimate” by a review commission set up to study the country’s US$10bn in external liabilities. (He also recently extended the July 31st deadline for the investigation of the foreign debt by a further two months.) Mr Ortiz had adopted a relatively moderate stance with regard to the debt issue. Ms Salgado, by contrast, had earlier campaigned in favour of a debt moratorium. Yet another shake-up at the finance ministry (there have been many since Mr Correa took office) and a renewed risk of moratorium triggered a decline in the prices of Ecuador’s bonds in international markets to their lowest level this year.

Yet despite the recent rhetoric, most financial experts believe that Ecuador is unlikely to stop its debt repayments as long as its capacity to pay remains robust. Fiscal revenues are currently benefiting from a windfall thanks to high international oil prices, so the ability to pay is not in question. Willingness is another matter, however. So, Ms Salgado herself immediately tried to reassure creditors that payments would continue, and this led to a modest rebound in the price of Ecuadorean debt. However, the concerns of creditors and investors in general are unlikely to completely recede, especially as Mr Correa continues to threaten private businesses.

Eye on referendum

The latest sabre-rattling by Mr Correa over debt payments and powerful economic interest groups may have another motive: to distract attention away from the debt commission’s slow progress as well as to build support for the government in advance of its referendum, likely to come in September. A new constitution being drafted by Mr Correa’s allies in the constituent assembly is expected to propose a broadening of presidential powers and, if approved, would likely lead to a new election.

However, polls suggest that Mr Correa might struggle to win enough support (50% of voters) to secure approval of the new magna carta. A recent survey found that only 41% of Ecuadoreans would approve the new constitution. This raises the possibility of a big government defeat. Control of the media outlets—the government has put the head of Ecuador's government television station, Enrique Arosemena Robles, in charge of the three networks—might help it to place advertising and ensure favourable coverage as a means to promote a “yes” vote in the referendum.