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QUITO, Oct 4 (Reuters) - A rebellion by police officers that ended with a fierce shootout to rescue President Rafael Correa revived memories of Ecuador's volatile history and concerns about stability in the oil exporting nation.
The role of the military, a struggling economy, slow-moving oil negotiations and a possible move by Correa to dissolve Congress, rule by decree and call elections are all points to watch this year:
Correa had threatened to dissolve Congress, rule by decree and call new elections shortly before the police rebellion. Although he appears to have since backed away from the move for now, it is still a clear policy option. It would allow the government to pass tough new rules for investors and increase its short-term financing options, although it would also anger Correa's opponents and raise the risks of new protests.
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. The government says the mechanism is designed to help break political deadlocks in a 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 legislative opponents, including members of his own party, has stalled key laws and came to a head over a law that will cut bonuses for police and soldiers as part of an austerity plan. The president last week said he was preparing to activate the rule known locally as the "double or nothing" law but backed down after the revolt.
The police protests led to eight deaths and Correa has decided against the measure in the short term, with a top minister telling Reuters the government would instead try again to work with Congress.
"I hope it is never needed, but it is there as an extreme option that exists if the national assembly obstructs the executive branch," Policy Minister Doris Soliz said.
The public austerity law that so angered police was due to take effect on Monday but the government says it will quickly reform several articles to calm tempers. How swiftly Congress acts will indicate whether lawmakers are ready to cooperate with the government.
In moments of crisis, the armed forces call the shots in Ecuador. Last week 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 strangled by popular protests. Last week 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.
The government has agreed to reform the law, but says the reforms will not fundamentally change the disputed articles. In a further sign of concessions, Ecuador's El Comercio newspaper reported that in the midst of Thursday's protests Defense Minister Javier Ponce met military top brass and promised to deposit money for soldiers' back pay that had been disputed by the government.
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 looked vulnerable to Ecuador's traditional volatility last week and the military could choose to exploit the moment 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 strong.
After excluding itself from debt markets by refusing to pay $3.2 billion in global bonds two years ago, Ecuador has met financing needs via bilateral loans and credit from China.
Concerned it may need more room for maneuver next year, especially if oil prices fall, the government is trying to pass a law allowing it to raise the debt ratio to 50 percent of GDP; issue short term local debt; increase the budget by 15 percent annually; and borrow money currently held by banks as their reserve requirements.
Critics say the law endangers the stability of the banking system. The government says it is designed to ensure short-term liquidity for public works projects. If Congress does not pass the law within a 30-day limit, Correa could revive the "double or nothing" option and rule by decree.
Also in the legislative agenda is a law that will limit to Latin American tribunals international arbitration in cases of conflicts between companies and the government - a move that may worry investors used to taking disagreements to the World Bank or courts in Europe or the United States.
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 angrily opposed by large landholders.
Correa says opposition leader and ex-president Lucio Gutierrez infiltrated Thursday's protests with the intention of toppling or killing him. The attorney general will now investigate Gutierrez's responsibility and if he is able to build a case may well order an arrest warrant. 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.
Whether a trial against Gutierrez is seen as legitimate internationally or is viewed as an unjustified clampdown on Correa's opponents will depend of the strength of evidence against him.
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 dollar inflows to cover spending and has suffered from falling private investment as Correa battles with business.
Private sector sources say last week's political turmoil could further chill investor sentiment. But fears of a run on banks following the crisis have not materialized.
Ecuador, which holds OPEC's rotating presidency, produces an average of 485,000 barrels of crude per day, and sends just under half of that to the United States. It is seeking better terms from companies, including Italy's ENI (ENI.MI), Brazil's Petrobras (PETR4.SA)(PBR.N) and Spain's Repsol-YPF (REP.MC).
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.
When passed, the new public finance law will help the government cover its financing needs after running a $4 billion deficit in 2010. (Editing by Kieran Murray)