Summary
Ecuadorian President-elect Rafael Correa announced that he wants to revise oil exploration contracts between the government and foreign companies to increase revenues and he will also not withdraw the government's unilateral cancelation of Occidental Petroleum investment contracts in the country. Coupled with his commitment to press for foreign debt renegotiation terms and/or default, the economic environment in Ecuador will be very worrisome for investors, national and foreign.
Analysis
The energy sector and its investors will have to face similar challenges to their established contracts as occurred before in Bolivia and Venezuela, and all indications are that Correa's new government will push to secure these energy revenues as the basis for delivering on his populist campaign promises of housing, jobs, health care, education, etc. We can expect his 1st quarter in 2007 to focus primarily on securing the commanding heights of the energy economy in the hands of the Ecuadoran state apparatus.
The financial and economic markets will not fare any better as he remains committed to altering the balance of power on the foreign debt and the established dollarization regime. Sovereign credit ratings of CCC+ are expected to fall as Correa has also indicated plans for review monetary policies which established "dollarization" in 2000. Investors dumped Ecuador's sovereign bonds due to concern that Correa will make good on his promise to cut Ecuador's debt-service costs by half, which sent yields soaring. One measure of the impression Mr. Correa has made on the markets: Ecuador's credit-default swaps -- essentially a bondholder's insurance policy against government bankruptcy -- cost as much as Iraq's.
Correa's populist style and promises, and the fact he has no congressional majority, can also result in the kind of gridlock politics which has resulted in lack of political working consensus and in the last three (3) Presidents being pushed out of office before their constitutional terms expired. Politically Correa will need to perform a delicate balancing act, but if his economic policies cause fear and concern, this will not be possible.
