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03/12/2010 | FACTBOX-Key political risks to watch in Ecuador

Reuters Staff

Ecuador has calmed down since hundreds of police officers mutinied on Sept 30, causing deadly riots and surrounding leftist President Rafael Correa for hours in a Quito hospital where he had taken refuge.

 

But investors are watching for any more signs of unrest as the violence revived memories of Ecuador's volatile history and concerns about stability in the OPEC-member nation. [ID:nN30130945]

The role of the military, a struggling dollarized economy and a possible move by Correa to dissolve Congress, rule by decree and call elections are all points to watch this year:

CORREA'S FIGHT WITH CONGRESS

Just before police rioted over public sector bonus cuts, Correa had threatened to disband Congress. Although he has since backed away from the move, it remains an option that would allow his government to push through legislation, including tough new rules for investors. It would also anger Correa's opponents and raise the risk of new protests. [ID:nN02293978]

Correa won support for a new constitution in 2009 that gives him the power to dissolve Congress, call elections for the president and lawmakers, and rule by decree in the meantime. His government says the mechanism is designed to help break political deadlocks in the country of 14 million people where lawmaking has often been paralyzed by conflicts between the president and Congress.

Correa's popularity is strong despite a slow recovery from the global economic crisis. With no obvious candidate to oppose him, the European-trained economist would be a clear favorite to win a new election, but his increasingly fractious Alliance Country party could lose seats in Congress, limiting his ability to pass laws.

Friction between Correa and opponents, including members of his own party, has stalled key bills and came to a head over a law cutting bonuses for police, soldiers and other public sector workers as part of an austerity plan.

The police protests led to eight deaths as army commandos stormed the hospital where Correa was being held by the dissident officers.

MILITARY

In moments of crisis, the armed forces call the shots in Ecuador. Sept. 30 was no exception and Correa appears to have made promises in return for support. The soldiers' renewed assertiveness may temper some of Correa's policies, or further undermine stability in the oil exporting nation.

Three of eight presidents were ousted in the decade before Correa took office in 2007. The military was key in many of those overthrows by refusing to come to assistance of the presidents being buffeted by popular protests. On Sept 30 the military rescued Correa, possibly saving his life, but also waited several hours to make its move. Before offering his support, armed forces chief Ernesto Gutierrez demanded the president reform or annul the controversial public sector law.

Correa has in the past kept military chiefs happy with salary hikes and appointments to cushy state jobs, but many soldiers are as angry as the police about the eliminated promotion bonuses and several groups of rank-and-file troops initially joined Thursday's protests.

Correa briefly looked vulnerable to Ecuador's traditional volatility and the military could yet try to use that to extract more concessions from him in return for continued support. However, the armed forces rarely act against popular sentiment in Ecuador and Correa's popularity is still above 50 percent.

PUBLIC FINANCE, INVESTMENT CONFLICT AND OTHER LAWS

After excluding itself from debt markets by refusing to pay $3.2 billion in global bonds two years ago, Ecuador has met its financing needs via bilateral loans and credit, mostly from China. [ID:nN04220951]

Correa is keen to kick-start Ecuador's nascent mining industry but has met with resistance from indigenous groups opposed to a law that would allow miners access to large quantities of water on their concessions, even if the land was communally owned by the Indians. This law will not be passed until 2011, because the government is obliged to organize a consultation process with the affected groups.

Next year will also likely see the passage of a law allowing the government to expropriate private land deemed idle to later be transferred to indigenous and peasant farmers. Land reform has always been a conflictive process in Latin America and the law is likely to be opposed by large land holders.

CLAMPDOWN ON THE OPPOSITION

Correa says opposition leader and ex-president Lucio Gutierrez infiltrated the police protests with the intention of toppling or killing him.

Gutierrez, who as an army colonel helped overthrow a president in 2000, was himself toppled from the presidency in 2005. He returned to prominence after running for president again against Correa last year and his Patriotic Society party emerged as the second force in Congress.

ECONOMY

Ecuador's economy, battered by the global recession, is slowly recovering and grew 2.74 percent year-on-year in the second quarter. With a dollarized economy, Ecuador is dependent on inflows of greenbacks to cover spending and has suffered from falling private investment as Correa battles with business.

The government expects economic growth of about 5 percent next year and inflation of around 3.7 percent. It also sees an average oil price of $73.30 per barrel in 2011.

Ecuador, which holds the rotating presidency of OPEC this year, forecasts total crude production of 181 million barrels in 2011 of which 126 million barrels will be exported.

OPEC will hold its final meeting of the year in Quito on Dec 11. [ID:nN29219137]

Private sector sources say September's political turmoil could further chill investor sentiment. But fears of a run on banks following the crisis have not materialized.

In November Ecuador, which holds OPEC's rotating presidency this year, won better better terms from petroleum companies, including Italy's ENI (ENI.MI: Quote) and Spain's Repsol-YPF (REP.MC: Quote) that operate in the country. Brazil's Petrobras (PETR4.SA: Quote)(PBR.N: Quote) refused to sign a new round of contracts that threw out old profit-sharing deals in favor of turning foreign operators into flat fee service providers. [ID:nN26118806]

Negotiations have been slow but are expected to be completed by the end of the year, in theory clearing the way for a slow expansion in investment and production. (Editing by Kieran Murray)

Reuters (Estados Unidos)

 



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