The leading opposition candidate in Ecuador’s presidential elections has dismissed the $17bn debt restructuring and IMF accord that rescued the country’s battered economy as a bad deal and vowed to put the interests of local people before the needs of international capital.
The September agreement was popular with international investors but the $6.5bn IMF loan was secured by drastic cuts to public spending. Andrés Arauz has promised to reverse them, blaming austerity for triggering a “self-induced” recession.
The 35-year-old economist says he wants to boost growth with a big rise in public spending, higher taxes and capital controls to stop money leaving the country.
Hailed by fellow leftists as part of a new generation of Latin American leaders that reject free market orthodoxy and stress development and social justice, Mr Arauz has sparked jitters on Wall Street with his radical programme, including his opposition to August’s IMF deal.
“We don’t see any sense in continuing with the current programme the IMF has with the Moreno government,” Mr Arauz told the Financial Times in an interview ahead of February’s elections. “Firstly because the quantity of resources is too small and secondly because the conditionality associated with it is absolutely counter-productive for Ecuador’s growth and development needs”.
Mr Arauz’s alternative is an immediate boost to public spending of up to 1.5 percentage points of GDP in the first months of his government, a major public works programme, an end to privatisation and a wealth tax.
“We need to restart economic growth and you don’t achieve that with a fiscal adjustment of three points of GDP,” he said in a video interview, referring to the IMF-endorsed austerity target for 2021 of President Lenin Moreno’s centre-right government. “That is maths, arithmetic and common sense.”
To pay for the programme, Mr Arauz would “reopen co-ordination between the central bank and the finance ministry so the central bank can buy securities from the finance ministry and in that way we can cover urgent financing needs”.
His proposals are popular on the campaign trail but have not won over international investors.
“With the economy only beginning to heal from the triple shock (Covid + oil + default), a populist economic policy agenda would just make the economy sicker and sicker,” said Bank of America in a research note.
Undaunted, Mr Arauz wants an early renegotiation with the IMF and is ready to walk away if necessary. The accord, he said, “is not binding on the Ecuadorean state because the IMF has said it’s not an international treaty, it’s an exchange of letters which has no negative consequences for Ecuador if we don’t keep to it.”
Private creditors can expect to hear from Mr Arauz too, though he said renegotiating with them was not a priority. He criticised August’s bondholder agreement for violating Ecuador’s constitution and said it overvalued the debt. “At the worst point of the pandemic, the bonds . . . fell to 20 cents on the dollar, 25 cents, 30 cents and nonetheless we ended up recognising much higher levels to the creditors,” he said.
Under the patronage of leftwing former president Rafael Correa, Mr Arauz enjoyed a meteoric rise. He was named a director of Ecuador’s central bank at the age of 24 and became a cabinet minister at 30.
Some opinion polls put Mr Arauz in the lead for the February 7 election while others suggest his main rival Guillermo Lasso, a 65-year-old conservative banker, is ahead. President Moreno, whose popularity has plunged to single digits, is not running again.
If Mr Arauz wins, he plans to bring back his mentor Mr Correa as a close adviser despite legal hurdles; the former president is living in Belgium after an Ecuadorean court sentenced him to eight years imprisonment for corruption. Mr Arauz believes the conviction was unjust and politically motivated.
“We are very confident that once we’ve achieved an electoral victory, the judges will apply the corresponding legal resources to undo his sentence . . . so he can return to the country like any other Ecuadorean citizen,” he said.
Ecuador was one of the Latin American countries hardest hit by coronavirus. The economy is expected to shrink about eight per cent this year and President Moreno’s emergency $4bn spending cuts included liquidating the national airline and closing embassies.
The government’s room for manoeuvre is severely limited because the country uses the US dollar as its currency, meaning it cannot borrow freely or print money to alleviate a crisis.
Mr Arauz has been critical of dollarisation but, aware of its popularity among voters, now says he would strengthen it. “Dollarisation is here to stay,” he said. “Once it has come in, it’s not desirable to leave. We need to strengthen it via creative measures so that we can have greater internal multipliers of the monetary base”.
The language hints at Mr Arauz’s profession — he is an academic economist — but also at one his personal heroes: Augusto Graziani, an Italian economist best known for his post-Keynesian “monetary circuit theory”, the idea that money is created by the banking sector making loans, rather than by central bank issuance.
To complement “creative measures” to stimulate the Ecuadorean economy and loans from multilateral lenders, Mr Arauz is also eyeing funds from the Far East.
“We are already opening dialogues with the development banks of China ,” Mr Arauz said. “We have a great relationship with the banks of the People’s Republic of China.”
Another source of funds in an Arauz presidency would be a wealth tax. Initially this would be a one-off levy of two per cent on assets of more than $1m, but Mr Arauz believes that a permanent wealth tax is desirable, as well as incentives for what he says is $30bn of Ecuadorean money held abroad to repatriate.
Would a wealth tax not be a problem? Mr Arauz waved away the concern, saying the business opportunities on offer in Ecuador were so profitable that the levy “will end up being a minor concern compared to the enormous opportunities in the country”.