Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Ecuadorean President Daniel Noboa is rushing to raise revenues as the country’s outbreak of drug-related violence threatens to spark an economic crisis in the Andean nation.
Noboa, who took office in November pledging to boost jobs and halt the crime wave, aims to refinance foreign debt, increase value added tax and delay a shutdown of Amazon oil production to fund the war he declared on “terrorist” drug-traffickers.
After the jailbreak of a powerful drug lord in early January, dozens of prison guards were held hostage by inmates while bandits took over a TV studio live on air. Noboa imposed a 60-day state of emergency, including a nightly nationwide curfew, as the army carries out raids on prison wings and gang-controlled neighbourhoods.
“War is costly — we need to take tough economic measures and we need to all be on board,” Noboa told a radio station this month.
Noboa’s approval rating has soared to 80 per cent since he assumed power, according to pollster Comunicaliza, as Ecuadoreans, exasperated by a security crisis that has led to the homicide rate multiplying nine-fold since 2017, back his hardline moves. The boost to his political capital may allow him to push through the economic reforms.
“It’s an opportune moment to get some of the toughest measures through because when it comes to crime and the fight against terrorism, the public is on board with anything,” said Alberto Acosta-Burneo, an economist at Spurrier Group, a consultancy.
The cost of violence was equivalent to about 6 per cent of Ecuador’s gross domestic product in 2022, according to the Institute for Economics and Peace, a think-tank. This month rating agency S&P Global downgraded Ecuador’s outlook to negative from stable, arguing the crime wave could hit reforms.
Even without these challenges, Ecuador’s public finances are tight, with last year’s fiscal deficit equivalent to 4.8 per cent of GDP. Government revenues fell 10 per cent last year, from $21.4bn in 2022 to $19.1bn, according to the Fiscal Policy Observatory, an independent monitor.
An oil and shrimp exporter, Ecuador has foreign debt obligations of $47.4bn, including with Chinese banks and the IMF. But Quito’s reputation as a serial defaulter limits its access to capital markets.
Noboa’s finance minister began talks in Washington this week with US government officials, multilateral lenders and other investors on refinancing debt. “It is important to have the help of the US as well as Europe so that we are not financially strangled while we wage this war,” said Noboa.
Ecuador’s congress is debating a bill to raise VAT by 3 percentage points to 15 per cent in order to raise $1bn this year and $1.3bn annually thereafter, though it has faced pushback from the opposition-led legislature. Noboa has also pledged to cut government spending by $1bn.
Noboa, reneging on a campaign promise, has proposed delaying closure of one of the country’s most productive oilfields. Ecuadoreans voted to shut down the Amazon block, which produces about 55,000 barrels a day, in a referendum last August, and it is due to cease operations this summer.
Guillermo Avellán, the central bank chief, said this week that without the proposed VAT increase and postponement of the oil block’s closure, GDP would contract nearly 1 per cent in 2024, after growth forecast at 1.5 per cent in 2023. If both measures are taken, the central bank predicts growth of around 2 per cent this year. Growth slipped from 4.2 per cent in 2021 to 2.9 per cent in 2022, according to the World Bank.
Noboa’s term lasts only until May 2025 as he is completing the term of his predecessor, Guillermo Lasso, who triggered a special election last year after facing an impeachment trial for alleged embezzlement.
In the port city of Guayaquil, businesses want to see order restored. Ecuador’s business capital has become a violent drug-trafficking hub. Banana, shrimp and coffee exports from the wider region had been hit, said Juan Carlos Díaz-Granados, executive director of Guayaquil’s chamber of commerce.
“When there’s violence in rural areas, where the crops are, it’s much more difficult to operate there,” Díaz-Granados said, adding that executives are now travelling to plantations by helicopter to avoid criminal activity on the highways. “There’s a risk factor there.”
Gangs have targeted business figures in the city, including Italian-Canadian restaurateur Benny Colonico who was kidnapped for ransom last June. He was held in different safe houses over six days before paying a ransom of $250,000 and now always keeps a gun nearby for protection.
“Nobody can invest here anymore, nobody even goes out for dinner because they’re so worried about security,” Colonico said in his apartment overlooking the Guayas river, from which the city takes its name, as his bodyguard kept watch. “But when you’ve already invested it’s hard to just leave.”
