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Gustavo Noboa
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WHEN GUSTAVO NOBOA took over the presidency from
coup leader Lucio Gutierrez at the beginning of 2000, he
proved an adept captain of the good ship Ecuador. Despite the
ramshackle nature of his vessel, he oversaw a successful
transition to dollarization, implemented large primary fiscal
surpluses, finally got construction moving on a new heavy oil
pipeline and was rewarded with the strongest economic growth
in Latin America.
Over the past year, however, and especially the past
six months, Noboa seems to have turned almost suicidal. He's
embarked on a massive, irreversible and unaffordable spending
spree just as his term as president comes to an end. When
Gutierrez - this time democratically elected - takes the helm
on January 15 he will find his ship steaming full speed ahead
towards the iceberg of default, with no time to slow or turn
around before the inevitable crash.
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Gutierrez: The incoming president
ran on
an anti-corruption ticket but may yet pay
for others' misdeeds
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"Ecuador's road, at least as Mr Noboa has traced it, ends
in February 2003," says José Barrionuevo, director of emerging
market strategy at Barclays Capital. "With sharply slowing capital
inflows and a sluggish economy, the country cannot afford to draw
on reserves to make $175 million in payments in February to avoid a
default. A decline in dollar reserves would undoubtedly fatally
wound dollarization and trigger a new run on the banking system and
the end of stability."
Many investors simply avoid Ecuador on principle, well aware of
its history of default, corruption and chaos. Every time it seems
as though the country has found a path to sustainable growth, it
inevitably loses its way surprisingly quickly. This time around,
investors and analysts are struggling to comprehend the sudden
change in the outgoing president's behaviour.
For the first two years of his term in office Noboa was Dr
Jekyll. An unassuming devout Catholic, he just happened to be
vice-president when Gutierrez ousted president Jamil Mahuad in a
short-lived coup. One day later, with the return of constitutional
rule, Noboa became president and took upon himself the task of
getting Ecuador's act together without bowing to any political
interests.
Over the past year, however, Noboa seemed to visibly give up the
fight, in a move most often explained by new-found political
ambition. With a determination to secure a future political career
for himself, Noboa's Mr Hyde side emerged. Fiscal responsibility
and the expenditure of political capital was out; caving in to
congress and expenditure of non-existent dollars was in.
Public-sector wages went up by an astonishing 55%, or $750 million
- and not in the form of one-off bonuses either. Gutierrez now
faces a monthly payroll that is well beyond what the government can
afford and that he is politically incapable of reducing. Cutting
wages, after all, is the most difficult thing for any politician to
do.
Black hole in the national
accounts
And in a final act of what can only be considered scorched-earth
politics, Noboa raised $245 million in December by selling forward
oil contracts - basically pledging more than 20% of 2003's oil
production in order to pay arrears on 2002's bloated wage bill.
This was done after the election of Gutierrez, in the face of
Gutierrez's explicit condemnation, and also in probable violation
of domestic law and Ecuador's international bond documentation.
It also queered the pitch for crucial negotiations between the
new government and the IMF, which has had a long-standing
non-negotiable opposition to any use of oil money for general
fiscal expenditure. Now that Ecuador looks as if it is in technical
default on its global bonds, it's hard to see how a payment default
can be put off for more than a few months.
The fault may not wholly be Noboa's, however. The forward oil
sales may turn out to have been his last desperate attempts to fill
a black hole in Ecuador's 2002 accounts - a hole caused by what
local consultancy Analytica Securities calls "massive
misappropriation and embezzlement performed by former economy
minister Carlos Julio Emanuel". Emanuel is in exile in Panama,
along with former president Abdala Bucaram, who's believed to have
absconded with hundreds of millions of dollars himself. The
Ecuadorian state auditor reported in the wake of Emanuel's firing
last year that he had diverted $108 million in unbudgeted funds to
local authorities, in return for kickbacks. Some estimate far
larger sums were involved.
If those estimates are even anywhere near the truth, Gutierrez
is going to inherit a much bleaker fiscal situation than the
already bleak official accounts suggest. And to make matters worse,
his political position is already dire.
For Gutierrez, a bit like Lula in Brazil, has control of the
presidency but not control of congress. In fact, he has the certain
support of no more than 20 of the 100 members of the house of
representatives. He's going to have difficulty building on his
support among the leftists and the indigenous movement, for they
are steadfastly opposed to austerity measures - such as the
elimination of various fuel subsidies - that he is going to have to
try to implement in order to get an IMF deal.
After all, as Alessandra Alecci, Ecuador analyst at Deutsche
Bank, says: "Even assuming a nominal surplus of $100 million and
arrears to the Paris Club, without an IMF programme it would be
impossible for the government to meet its debt payments."
On the other hand, Gutierrez will face even more difficulty if
he attempts to cultivate the right, which has steadfastly opposed
him and would want him to become a figurehead, with their own man,
former president León Febres Cordero, calling the shots.
And the worst outcome of all would be if Gutierrez ended up
trying to cut a deal with the powerful Roldosistas, the party of
Bucaram. Gutierrez ran on an anti-corruption platform, and the cost
of any deal would certainly be immunity for Bucaram (who remains
popular in Ecuador) and a free path for him to return to a position
of political power.