Elections in Ecuador: Two opposite options

By Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_Eco

On Sunday, April 11, Ecuador will go to the polls to choose between Andrés Arauz, candidate of Correísmo; and Guillermo Lasso, candidate of the CREO-PSC alliance (with the support of other political forces).

These are two diametrically opposed alternatives, in almost all aspects.

While Arauz said in his proposal on "good de-dollarization" that he will raise the Tax on Currency Outflow (ISD) to 27%, and that the Central Bank would grant a "fixed quota" for importers (creating a market distortion, as he himself recognized in his 2009 Master's Thesis); Lasso proposes to eliminate the ISD. Apart from this exchange control (unique in a dollarized economy), Arauz would probably increase tariffs or collect safeguards on imports again.

The correista bloc in the Assembly also proposed to deliver a “universal basic income” in “electronic currency”; candidate Arauz later rejected that proposal and said, instead, that a $ 1,000 bond would be delivered to 1 million families by taking resources from the reserve of the Central Bank of Ecuador. It should be mentioned that these correspond to the reserve of private bank deposits held in the Central Bank; that is, ultimately, it is the depositors' money. Currently, the international reserve does not cover all commercial bank deposits, which is why there is a gap of nearly $ 7 billion between the assets and liabilities of the Central Bank (the Moreno government began to reduce this gap inherited from Correa, but with the pandemic it has increased again).

In more general terms, Lasso's proposal focuses on the generation of productive employment, and he even proposed increasing the monthly minimum wage to $ 500 (from the current $400); while Arauz focuses on the delivery of cash transfers, even at the risk of further reducing the net international reserve, and therefore putting dollarization at risk.

Arauz's pre-announcement that he will increase the ISD to 27% could possibly lead to an outflow of currency in anticipation of this measure.

Lasso has proposed to lower five taxes, while Arauz proposes to increase the income tax and create a wealth tax. Arauz would bet on strengthening a State-centered model, including increasing public spending; while Lasso would seek to strengthen the private sector.

Lasso proposes reducing income tax for companies that create at least 10 jobs.

While Lasso has said that he would strengthen dollarization, Arauz talks about the emission of "electronic currency" and using the resources of the international reserve. By refusing to lower public spending and investment, Arauz will maintain a high deficit and continue with the aggressive public indebtedness process that began in 2014 under Correa; it is likely that his fiscal policy, his proposal to raise the ISD, the potential use of the BCE reserves and the issuance of electronic money would lead to Arauz not receiving the outstanding disbursements from the IMF for $ 2.5 billion. Lasso has said that he would seek to reduce the deficit.

On issues that interest the young and progressive voters of Hervas and Yaku Pérez, such as mining, oil exploitation and the protection of water sources, Lasso's position is closer to the voters of Pérez and Hervas than the practice of Correísmo, which expanded oil and mining extraction, even in places of great biodiversity and environmental vulnerability such as the Yasuní National Park (manipulating the Electoral body under its control for the purpose of thwarting a plebiscite against oil exploration in the Yasuni). Lasso proposes to maximize environmental prevention in mining and oil production, including prior consultation of affected communities.

This extreme extractivism during the Correa decade even led to the murder of several indigenous activists who were opposed to the oil and mineral exploitation, such as Bosco Wisuma, Freddy Taish, José Tendentza, three of the 35 unsolved murders of the Correa government (others include 15 journalists and people who denounced corruption , such as General Jorge Gabela, Quinto Pazmiño and his wife, journalist Fausto Valdivieso, among others).

Correísmo also faces accusations and sentences of corruption, including Rafael Correa, Jorge Glas, ministers Carlos Pareja Yanuzelli, María de los Ángeles Duarte, Ricardo Patiño, Walter Solís, Vinicio Alvarado, Fernando Alvarado, Alecksey Mosquera, María Duarte, Raúl Carrión , Ramiro González and Viviana Bonilla, the Legal Secretary Alexis Mera, the Comptroller Carlos Polit, the assembly members Cristian Viteri and Esperanza Galván, the president of the Central Bank Pedro Delgado, the directors of the IESS María Sol Larrea and Iván Espinel (as well as former IESS President Ramiro González), the director of Petroecuador, Álex Bravo, the Secretary of Intelligence, Pablo Romero, the Secretary of Communication Carlos Ochoa, and the Presidential advisor Pamela Martínez, among others. Of these, 8 were imprisoned, and the rest are at large. It is estimated that the amount of resources lost to corruption reached $ 35 billion.

Arauz has mentioned that he will seek to have the sentences against Correa and other members of his government annulled.

Lasso has never been criminally charged, and, despite the fact that the Correa government investigated his alleged participation in the banking crisis of 1999, he was never accused. Eduardo Valencia, who led the investigation, found presumptions of guilt of Juan Falconí Puig and Pedro Delgado in the embezzlement of the CFN that occurred in 1999-2000, but they were never charged or separated from their positions in the Correa government; Delgado fled to his “son's wedding” in Miami in 2012 and never returned.

Arauz affirms that virtual platforms are natural monopolies, and that is why they must be considered public utility goods, as happened when they turned the right to communication into a public service. This proposal would be aimed at controlling virtual platforms and their users.

The two government plans could be strengthened in terms of environmental issues, sexual and reproductive rights, identity issues, the prevention of animal abuse, and gender and diversity approaches, among other topics of interests of the Millennial and Gen Z voters.

(*) This is a translated and expanded version of the column published in Diario “El Universo” on March 5^th, 2021.

https://www.eluniverso.com/opinion/columnistas/dos-opciones-opuestas-nota/

The image shows the original version of the article by Andrés Arauz on "good dedollarization".

Good de-dollarization?

By Luis Fierro Carrión (*) 

Twitter: @Luis_Fierro_Eco

Econ. Andrés Arauz, today a presidential candidate, published in his blog on April 20 an article entitled “Bad de-dollarization and good de-dollarization”.

In the original version, the second “de-dollarization” was not in quotation marks, and the article mentioned that the new system “could be nicknamed with a name, that of the new ‘currency’ ”. On November 26, realizing that the article had generated criticism, he first blocked access, and then presented a modified version, in which the supposed "good dollarization" now appeared in quotation marks, and the phrase "new currency" no longer appeared, but rather the truncated phrase "could be nicknamed with a name."

At the same time that the debate on the article by Andrés Arauz was taking place, the correista bloc presented in the National Assembly a bill to create a "Universal Basic Income" (UBR), which would be delivered to at least one million heads of families, for 400 units of the new "electronic currency." An almost identical proposal appears on page 18 of Yaku Pérez's government plan: "said basic income could be paid in electronic money."

The RBU proposal presented by Correísmo would start with 400 units of this “electronic currency”, but it is foreseeable that in a few months its value would fall, since it is an inorganic issue without any support or financing. It is worth mentioning that the quasi-currencies issued in Argentina (“patacones” and others), at the end of the convertibility period, lost up to 35% of their value; while the Venezuelan “petro”, a digital currency created by the regime, has lost 85% of its value. Thus, it is not impossible that the 400 units of this "digital currency" could come to represent less than the USD 50 of the current human development bonus (a cash transfer program that already exists in Ecuador).

If the State used this "electronic currency" to pay salaries to public employees, suppliers, etc., a bimonetary system would quickly be imposed, in which the "electronic currency" would rapidly lose value against the US dollar; and there could be a de facto de-dollarization, seizing bank accounts, restricting access to dollars for importers, etc.

Arauz's article continues by proposing to raise the “currency outflow tax” (ISD) to 27%, which would become a “fixed quota” sold by the Central Bank (five times the current ISD of 5%).

It is worth mentioning that, although this tax is supposedly on the "outflow of currency", in practice it becomes a disincentive for the inflow of funds for investment, since investors know that, in order to import machinery, equipment, intermediate goods and inputs, as well as to be able to extract the dividends earned, they will have to pay this rate (either the current 5%, or the 27% proposed by Arauz). To this is add that this "limited quota" would be "granted" by the State, effectively generating a multiple exchange market, the same one that has led to major problems (and great corruption) in the countries that have applied it, such as Venezuela. or Argentina.

One may wonder why would presidential candidates in Ecuador propose a "de-dollarization" by issuing an "electronic currency", considering that dollarization enjoys a popularity of 80-90% of the population, which is understandable, given that the US dollar is a “hard currency” that generates certainty, and allows long-term investments and loans to be made.

The answer may be that dollarization imposes economic and fiscal discipline. If exports fall, imports must be restricted. If tax revenues are reduced, public spending must be restricted. The only alternative, in both cases, is debt, a mechanism to which the governments of Alianza PAIS in the last 14 years have resorted, until a public debt of 60% of GDP has been reached.

Dollarization prevents the financing of the public sector through inorganic monetary issuance, and also prevents increasing income (in a national currency) for public or private exporters through devaluation.

Those who promote de-dollarization do so with the ultimate aim of reducing real wages, causing devaluation and inflation, supposedly to make Ecuador more “competitive”. During the Correa government, the minimum wage was increased at a faster rate than productivity, with which each hour of minimum wage in Ecuador costs twice that of our neighboring countries, Colombia and Peru.

But a de-dollarization, devaluation, and inflation would only create more misery, apart from generating uncertainty, lack of confidence, and a flight of capital.

That is why unions, workers, retirees and others who receive a fixed income throughout the world have always fought for a “hard currency”, which does not bleed in the midst of inflation (this was one of the flags of the struggle of the slain workers on November 15, 1922).

Arauz, Pablo Dávalos and their allies persist in confusing the "outflow of currency" with the "capital flight". More than 90% of the outflow of dollars corresponds to imports of goods and services. All that a tax rate (5% or 27%) does is increase the cost of goods and services for consumers in Ecuador.

Arauz proposes to "reduce the gross outflow of private foreign currency by 10%"; and, furthermore, "a second goal would be to repatriate $ 12 billion from the private sector." In other words, he wants the State to intervene in private decisions, and in some way obligate the “repatriation” of external assets held by the private sector. It is easy to assume that threats of seizure, 27% taxes, and more restrictions on the private sector will NOT create an incentive to attract foreign capital.

Moreover, such monetary and fiscal proposals would lead to no new disbursements from the IMF program, with which the financial and fiscal gaps of the next government would widen.

(*) Translation of an extended version of a column published in the daily newspaper “El Universo” of Ecuador, on December 4^th, 2020.

https://www.eluniverso.com/opinion/2020/12/04/nota/8070676/desdolarizacion-buena

How are oil exporting countries facing the falling price of oil?

By Luis Fierro Carrión (*)

(A Spanish version of this article was written for the February 2015 edition of Revista Gestión, Ecuador).

The international price of crude oil has dropped by 50% between June 2014 and February 2015 (the benchmark West Texas Intermediate - WTI - has dropped from $ 105 US dollars per barrel to $ 50, while the Brent fell from $ 115 per barrel in June to $ 61 in February).

http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=1y

While it is difficult to predict the future evolution of economic variables, it is not impossible - in September 2013 I had already predicted a fall in the oil prices, in an article published in Revista Gestión No. 231 (http://goo.gl/qZJin8) and in my blog (http://goo.gl/BsKHab).

Several structural factors in the oil market lead us to believe that the price will remain at around current levels, and take time to recover:

• Supply has increased, particularly with the expansion of oil production in North America, which has led the US to replace Saudi Arabia as the world's largest oil producer; and that Canada has entered the list of the 10 largest oil exporters. It is estimated that there is an oversupply of 1.5 million barrels per day (bpd).

(See chart on changes of oil production on p. 160 of goo.gl/JY5lnG).

• Reduced demand due to the promotion of renewable energies and energy efficiency, the persistent recession in the European Union and Japan, and slowing economic growth in the BRICS countries (Brazil, Russia, India, China and South Africa - particularly Russia, which has entered into an economic crisis, and Brazil, which will also see an economic contraction).

• In 2014, there was a total of $ 310 billion invested in clean energy, the issue of "green bonds" tripled to $ 38 billion, and the capacity of renewable energy generation reached 1,560 GW (http://goo.gl/5xQpQt, http://goo.gl/b1FBfs).

• An additional factor was the appreciation of the US dollar against other currencies (by 10% over 2014), which implies cheaper dollar-denominated commodity prices.

In addition, Saudi Arabia and other oil exporters in the Middle East changed their strategy, from the defense of high prices to the defense of market share, to the extent that Prince Alwaleed bin Talal of Saudi Arabia stated that the price of oil will never again reach $ 100 per barrel, due to changes in supply and demand.  There were also reports that Saudi Arabia was using the oil market to pressure Russia to abandon its Syrian ally, Bashar al-Asaad (http://goo.gl/4nbQQV).

Some OPEC members may also be seeking to pressure some high-cost producers such as those drilling using hydraulic fracturing ("fracking"), the tar sands of Canada and Venezuela, and those who drill on offshore platforms in inhospitable areas (such as the Arctic Ocean). There has already been a decline in investment in new wells, with the suspension of investments for several tens of billions of dollars (http://goo.gl/Yi9rDb). The bet of some Middle Eastern producers is that, after several years of reduced exploration in new wells, global supply will fall, they will regain market share, and prices will rise again.

Goldman Sachs predicted that WTI will remain at $ 39 per barrel over the next six months, and will reach $ 65 within 12 months (previously, it forecasted $ 75 and $ 80 at 6 and 12 months) (http://goo.gl/vXhvXa).

Macro-economic impact

The oil exporting countries exported a total of about 43 million barrels per day (of which about 30 million were from OPEC). Of this total, 75% corresponds to the 10 largest exporters. Export revenues amounted to US $ 1.56 trillion, at an average price of $ 100 per barrel and $ 784 billion at an average price of $ 50 per barrel - that is, those countries have lost approximately half of their oil revenues (in practice, even more than half, as part of the production is performed by private companies, that participate in the rent - or, in the case of Ecuador, have a guaranteed price for their provision of services).

Among the top 10 exporters, oil revenues represent an average of 24.5% of GDP; the impact on GDP growth rate is estimated between -3.8% in Saudi Arabia and +0.2% of GDP in Canada (in Canada the ratio of oil in total GDP is minimum, 3.2%).

In the case of Ecuador, oil’s share of GDP in 2012 was 19.1%, and Maria de la Paz Vela estimated in issue No. 247 of Revista Gestión, in a low scenario, with an average oil price of $ 61.5 per barrel, GDP growth would be between 1.8 and 2.3%, i.e. about 2% below the initial projection of the government. The average impact on GDP for OPEC countries for which there are estimates is -1.9%.

Oil exports also represent a significant percentage of total exports, which fluctuated in 2013 – according to OPEC – between more than 99% of exports for the cases of Angola, Libya and Iraq, 96% in Venezuela and 33.2 % in the case of the United Arab Emirates (UAE). Ecuador was in an intermediate point between OPEC countries, with 54.9%. According to the Central Bank of Ecuador (BCE), this percentage dropped to 51.3% in the third quarter of 2014 (reflecting the initial drop in prices).

But what is more serious is the impact on tax revenues. The dependence on oil revenues in some OPEC countries in 2013 amounted to over 90% of total tax revenues (Saudi Arabia, Iraq and Libya). Venezuela was in between, with 46.6%, while in Ecuador it was about 30%.

Another way of looking at fiscal dependence is the price of oil that is required to balance the fiscal accounts. Here the range is between $180 US dollars per barrel for Libya, to $ 137 for Iran, about $ 120 for Ecuador and Venezuela, and $ 68 for the UAE.

The difference between the level of dependence on oil for revenue and the price per barrel that is required to balance the budget is because some countries were already dragging a large fiscal deficit and foreign debt. In Venezuela, for example, the fiscal deficit had already exceeded 14% of GDP in 2014 - before the collapse of the international price of oil - while in countries like Iraq, Ecuador and Algeria, the fiscal deficit already exceeded 4% of GDP.

            

In part, the fiscal deficit in some oil exporting countries is due to the high subsidies offered to energy consumption. According to IMF estimates for 2011 (http://goo.gl/n45CYl), Iran offered energy subsidies (oil, gas, electricity and coal) amounting to 50.94% of total tax revenue. Second among oil exporters stood Venezuela, with 20.38%; then Saudi Arabia with 18.66%, UAE with 16.25%, and Ecuador fifth with 15.88% of tax revenue. Since then, Iran and other countries (Egypt, India, Indonesia, Malaysia, among others) have significantly reduced their energy subsidies. Some analysts and institutions have suggested that now is the best time to reduce subsidies, since prices have dropped, so the impact of the elimination of subsidies will be reduced.

Economic policies to address the fall in oil prices

With respect to the response that major oil exporters have adopted to the fall in international prices, we can divide the exporting countries into three groups:

a) Countries with high international reserves and sovereign wealth funds

Many countries exporting oil and other commodities took advantage of the windfall gains of the last decade (with high prices) to accumulate international reserves, sovereign wealth funds (SWF), pre-pay their debts, and accumulate other net assets. That is to say, they followed anti-cyclical policies, and saved during the time of "fat cows".

For example, Saudi Arabia currently has reserves of $ 740 billion, equivalent to 60 months of imports (five years); additionally, it has two SWFs with a current value of $ 762 billion. In other words, it can overcome a prolonged period of low prices without any difficulty (and, additionally, has proven reserves of 265 billion barrels, which means it could continue producing at current levels for 28 years, without any additional exploration).

In the case of the UAE, while reserves only cover imports for 2.8 months, it has the second largest amount invested in sovereign wealth funds (after China), with a total of $ 1,078 billion. Adding the reserves and the funds, it has enough to cover 54 months of imports.

Norway and Canada, which are the ninth and tenth largest oil exporters, have the third and seventh largest amount invested in sovereign funds, $ 893 and $ 416 billion respectively.

b) Countries with average levels of reserves and sovereign wealth funds

Another group of oil-exporting countries whose reserves allow them to import between 8 and 20 months of goods are: Angola, Iraq, Russia, Iran, and Nigeria. All these have sovereign wealth funds, with amounts ranging from $ 1.4 billion for Nigeria to $ 181.8 billion in the case of Russia.

In each of these cases, there are, however, other complicating factors:

• Russia and Iran are subject to international sanctions (for the invasion of parts of Ukraine in the case of Russia, for the enrichment of nuclear material in Iran's case). In both cases, they also face significant fiscal deficits and foreign debt.

• In the case of Russia, the ruble has lost half of its value in the past year; the stock market has fallen 48.5% since last year; a fiscal deficit of 3% of GDP is forecast; and a GDP contraction of 4-5% in 2015. The rating agency Moody's downgraded the Russian debt to Baa3, or “junk” category. It is uncertain what the effect of the severe economic crisis might be on Russia’s foreign policy, particularly regarding the intervention in several former Soviet countries (Ukraine, Georgia, Moldova, etc.).

• As for Iran, its currency (the rial) has lost two thirds of its value against the dollar in recent years; it has already reduced subsidies to energy and basic goods; and 20% spending cuts were announced. Iran is likely to consider the desirability of reaching an agreement regarding the development of nuclear materials to remove sanctions (which have led to reducing oil exports in half).

• Iraq faces internal conflict, which has recently evolved into the occupation of part of its territory by the Islamic State, and the growing autonomy of the Kurdish region. Given the severe impact of the falling price of oil on their tax coffers, it will probably have to reduce energy subsidies, and make other spending cuts, while at the same time trying to consolidate the power of the central state.

• Nigeria also faces ethnic conflicts, particularly by the Islamist group Boko Haram. It also suffers from problems of governance and corruption. The rebel groups steal some of the oil production; and in late 2013 the Governor of the Central Bank reported that the State oil company had failed to deposit $ 50 billion in oil revenues.

• Angola is nominally a country ruled by a Marxist party that led the process of independence with support from Cuba. However, the daughter of President José dos Santos (in power for 35 years), Isabel, is the richest woman in Africa, with a fortune estimated at $ 3 billion; his son, José Filomeno, was named Manager of the (public) sovereign wealth fund of Angola, and also founded a private bank in Switzerland. Angola will likely cut government spending.

c) Countries with meager reserves, high fiscal deficits

Finally, we have the cases of Ecuador and Venezuela, which have reduced amounts of international reserves; a sovereign fund with very meager investments in Venezuela ($ 800 million) and none in Ecuador; which were already facing high fiscal deficits for several years (despite high oil prices); and which have also been increasing their indebtedness rapidly in recent years.

According to a study by the Institute of International Finance, "Weaker public finances will dim the growth outlook for net oil exporting countries such as Ecuador, Venezuela and some in MENA (Middle East and North Africa), where rising oil revenues boosted fiscal spending in recent years… Countries with an already high current account deficit, such as Colombia and Ecuador, could come under additional pressure. Venezuela and Ecuador in particular have a low reserve coverage ratio and fragile capital market access, posing financing risks” (http://goo.gl/ipGyGU).  The two countries also have high levels of energy subsidies.

The Presidents of the two countries traveled to China in January to try to get new credit.

In the case of Ecuador, the official news agency ANDES announced a line of credit from Eximbank of China, to finance the export of goods and services from China, amounting to $ 5,296 million; $ 250 million of the same entity for the import of induction stoves; $ 1,500 million from the China Development Bank (CDB) to partially finance the investment plan of Ecuador; and $ 480 million from the Bank of China to finance Millennium Schools and other infrastructure projects. The Finance Minister subsequently reported that, of this total, about $ 4 billion would enter in 2015. The Inter-American Development Bank (IDB) would provide $ 800 million. These new loans will help to close the funding gap in the budget, estimated at $ 10 billion after the fall of oil prices.

With these loans, total debt to China (including the balance of oil pre-sale credits) exceed $ 10 billion; and constitute almost half of the public external debt, that with these new resources would amount to $ 21,713 million. Total public debt, including domestic, would represent more than 30% of GDP, still below the legal limit of 40%.

Unlike other producers of oil, Ecuador is dollarized and therefore cannot devalue or promote a depreciation of the exchange rate (in fact, as was noted above, the dollar has appreciated against other currencies). This has led the government to impose trade safeguards against imports; restrict the import quota of vehicles (assembled and CKD); and adopt other import restrictions. Some fiscal measures were also adopted to try to raise the non-oil tax revenues (surtax to telecommunications companies that dominate the market, limits to the distribution of private company profits to their employees; 100% tax to stoves, water heaters and other appliances that use gas; among others).

The government cut by 3.9%, $ 1,420 million, the 2015 budget (in part, by suspending the salary increase to public employees of 5% that had initially been considered).

            

Venezuela presents a more complicated picture, given the high dependence of the economy on oil: 96% of exports, 26.7% of GDP and 46.6% of tax revenues. The public external debt reached $ 118 billion in 2013. In recent weeks, the "country risk" has risen to 3,100 points, insurance in case of moratorium (CDS) has soared, to reflect a moratorium probability of 81% in a year; and the risk rating has fallen to near-moratorium levels (Moody's downgraded to Caa3 from Caa1, just one step above moratorium).

The fiscal deficit, which had already reached 14% of GDP, could increase despite the announcement of a 20% cut in spending. The bolivar is currently handled in various exchange rates, and there is growing scarcity of commodities. The official inflation rate has exceeded 63%, the highest in the world.

Other Policy Recommendations

In its study on "Global Economic Prospects" published in mid-January 2015 (http://goo.gl/JY5lnG), the World Bank made some policy recommendations against falling oil prices:

• Reduce or eliminate subsidies to fossil fuels.

• Instead, consider introducing fuel taxes (to continue promoting the reduction of energy intensity of GDP, despite the lower oil price).

• "For oil-exporters, the sharp decline in oil prices is also a reminder of the vulnerabilities inherent in a highly concentrated reliance on oil exports and an opportunity to reinvigorate their efforts to diversify. These efforts should focus on proactive measures to move incentives away from activities in the non-tradable sector and employment in the public sector, including encouraging high-value added activities, exports in non-resource intensive sectors, and development of skills that are important for private sector employment" (p. 168).

The collapse in oil prices could help oil producers and exporters to move away from high-emission sectors and industries towards renewable energy and other low-emission technologies.

In the article published in Revista Gestión No. 231 (September 2013), which had anticipated a future decline in oil prices, I added the following: "What can Ecuador do to adapt to this scenario? In general, it should invest windfall revenues currently generated by oil, either through a sovereign wealth fund (á la Norway or Kuwait) or directly in the generation of hydropower and other renewable energy, and development of other sources of revenue." I also recommended "to reduce the subsidy to domestic consumption of hydrocarbons."

In No. 242 (August 2014), Maria Gabriela Vivero and I suggested that "moments of expansion and large inflows of resources such as this should be used to repay debt and build reserves. Therefore, the aggressiveness with which the Government is acquiring new debt obligations is surprising".

(*) Climate Finance Advisor. Economist, Catholic University of Ecuador; M.A. in Economics, the University of Oregon, M. Sc. Econ. and Ph.D. (c), the University of Texas at Austin. The views expressed are personal and do not reflect those of any institution.