Trying to please both God and the Devil
President Lenín Moreno’s position on the razor's edge is evidenced by his contradictory and mild decision making on important political and economic issues. The new economic program launched recently by Ministry of Finance Carlos de la Torre is no exception.
Moreno’s effort to maintain his leftist affiliation, while also satisfying sectors from the right, speaks to his desire to please everybody, and to maintain the high public ratings he presently enjoys.
But when you try to please everyone, you run the risk of satisfying no one. In the economic arena, workers, entrepreneurs, consumers and the unemployed all believe the program fails to address issues fundamental to them, or to the country. On the political side, correistas, anti-correistas, government opponents and supporters all judged the package insufficient to resolve the political conflict present since the day Moreno stepped into office.
Though Moreno is a weak president, he has dared to launch a high-risk campaign for a referendum. According to recent polls, around 68% of the public would today vote “yes” to his proposed questions on controversial topics, such as the ability to make unlimited runs for re-election. But public sentiment could change by March, when the referendum might take place. Thus, there is a risk of defeat, which would give the Rafael Correa-led Alianza Pais an opportunity to regain lost political leadership.
Recent economic performance reports brought good news, as GDP growth in Q2 was 1.9% q/q, and 3.3% y/y. But not even the Central Bank is changing its estimate of 0.7% growth for 2017. We have updated ours to around 0.3%, in line with IMF estimates.
On the other hand, the aggressive growth of imports is weakening the balance of trade once again, in a time when the level of international reserves and Central Bank liquidity raises a clear red flag.
The government announced an increase in tariffs on the final price of imported products, for as much as WTO agreements allow. This would generate around $1,600 million per year for the government. It would also increase customs revenues by 50% -- which implies that custom authorities from the past administration did not do a very good job. What the government is not acknowledging is the unavoidably strong increase in durable consumer prices, and the incentives for smuggling – already a chronic disease.
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