Everything Is Going Wrong in Ecuador

As emerging markets come unhinged around the world, few nations face tougher challenges than Ecuador, a dollarized oil producer in El Nino’s path, where street protests are flaring up alongside one of the planet’s most dangerous volcanoes.

With crude sinking below $40 a barrel and few reserves to bolster public finances, frustrated citizens wonder where profits from the OPEC nation’s oil boom went. President Rafael Correa’s popularity dipped to an all-time low in late June before rebounding. The Cotopaxi volcano outside Quito threatens its first major eruption in more than a century and one of the worst sets of El Nino storms since 1950 is forecast to bring crop-crushing floods to the Pacific coast.

“People are worried about it all, the eruptions, the economy,” said Michel Levi, a professor and coordinator of the Andean Center of International Studies at the Universidad Andina in Quito.

Some are reminded of the late 1990s, when the last severe El Nino cycle hit amid plunging oil prices and widespread protests. That collision of natural disaster and economic crisis ushered in a period of acute instability that culminated in the collapse of the nation’s financial system and the adoption of the U.S. dollar as the official currency.

Correa, who took office in 2007, turned much of that around. Record oil profits and more than $10 billion in Chinese loans helped him preside over record-setting construction of highways, hospitals, schools and hydroelectric dams, which jumpstarted growth. Improved access to public education and health care propelled him through two re-elections.

Dark Side

Poverty has declined to about a fifth of the nation’s 16.3 million people from more than a third. Infant mortality and illiteracy rates have fallen while cheaper state credit has given many a chance to buy their first home.

All of this has turned Correa, a self-described revolutionary socialist, into Ecuador’s most powerful politician since the end of military dictatorship in 1979. The prosperity has come with a dark side, however, including what human rights groups condemn as a clampdown on press freedoms and use of the nation’s courts to silence opponents through jail terms and hefty fines. The government has rejected such charges as lies.

Now, Correa faces more challenges and he is accusing labor unions, indigenous groups and middle-class workers concerned about new tax proposals of joining a “conservative restoration” bent on overthrowing him. His government often interrupts television and radio broadcasts to accuse opposition politicians, journalists and foreign governments of plotting a “soft coup.”

Severe El Nino

Even without the potential natural disasters, Ecuador was facing a painful adjustment from the oil shock and stronger dollar that will probably lead to years of recession, wage cuts and severe unemployment, according to Bank of America Corp.’s senior Andean economist Francisco Rodriguez.

Oil rebounded from a six-year low as investor appetite for risk recovered and China’s central bank cut its benchmark lending rate for the fifth time since November. Crude has still slumped more than 35 percent since this year’s closing peak in June.

The plight of the country’s cocoa farmers, the world’s biggest producers of the beans used in fine chocolate, highlights some of those risks.

Heavier-than-normal rains in the first half of the year have already damaged half of the cocoa trees at a time when slowing demand from Europe and China and unfavorable currency swings are hurting sales, according to Ivan Ontaneda, the president of the National Cocoa Exporters Association. Local forecasters are now predicting a more severe El Nino than in the late 1990s when about half the nation’s agricultural harvest was destroyed, he said.

“We’re raising an alarm before the situation gets worse,” Ontaneda said by phone from Guayaquil.

State of Emergency

Ecuador can ill afford to lose any of this year’s harvest because agricultural exports like bananas, shrimp and cocoa help maintain enough liquidity in the economy to support dollarization.

As to the volcano, the government decreed a national state-of-emergency on Aug. 15 to prepare for the worst, setting up evacuation plans for affected areas. The decree includes suspending some constitutional rights and banning media from publishing unauthorized information.

Cotopaxi, some 50 kilometers (31 miles) south of Quito, is considered one of the world’s most dangerous. Spewing lava from its enormous height could cause catastrophic mudslides and flooding by melting glaciers that cover the volcano’s peak. Much of Quito’s urban expansion in recent decades has filled potential flood plains.

Responding to such a natural disaster won’t be easy because Ecuador’s government failed to save and plan during the oil bonanza, said Jose Hidalgo, director of Cordes, a Quito-based research institute.

Thin Cows

Ecuador’s communications secretariat referred a request for comment to the economic policy and finance ministries. Neither replied to telephone and e-mail messages. Correa has often dismissed the idea of saving for a rainy day by arguing, in effect, that it’s always raining. Last November, he referred to the biblical story of seven fat cows and seven thin ones, saying that to conquer poverty, “we are always in the era of thin cows, and the wisest is to use every last dollar of savings that we have.”

With monetary policy controlled by the U.S. Federal Reserve, Ecuador’s government can’t print more dollars to help offset years of capital outflows. That’s why unexplained delays in promised loans from China, Ecuador’s biggest external creditor, are so important, said Eurasia Group analyst Risa Grais-Targow.

“They really don’t have the flexibility or tools that they can use to respond to a more difficult oil price environment,” Grais-Targow said from Washington. “They are really hamstrung in a way that some of their neighbors aren’t.”

Gallows Humor

Less external financing also limits Correa’s ability to use public spending to calm street protests as he attempts to push through a constitutional reform to allow himself to run for another term in office, she said.

For now, Ecuadoreans are resorting to gallows humor.

“Sometimes it makes you want to laugh,” Cordes’ Hidalgo said. “What else could happen to us?”

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