Good Correa / Korea Moves

As we anticipated, Ecuador’s President Rafael Correa was decisively re-elected in a first round victory on February 17. Moreover, his Alianza PAIS (AP) party increased its dominance of the unicameral National Assembly, and now holds two-thirds of the seats. With such strong support from both the electorate and legislature, we anticipate greater government intervention in the economy during Correa’s next term (2013-2017).

  • Correa pledged to deepen his ‘Citizens Revolution’ political agenda in his new term, which encompasses high levels of social spending, but undermines the private sector through high levels of state interference.
  • We see this playing out through stringent requirements affecting foreign investment, such as advance payment of royalties and sizeable tax burdens.
  • We also highlight a likelihood of greater state intervention in the banking sector. Correa has publicly spoken against rent-seeking lending practices by banks, and a recent tax on banks’ revenues to finance a monthly cash transfer for lower income house-holds points to greater involvement in the financial sphere.

The extension of Correa’s rule also supports our long-held view that the Ecuadorean energy sector will continue to stagnate over the next few years. (Subscribers should refer to Business Monitor Online, February 1, 2013, ‘New Oil Production Targets Are Likely To Be Missed’). That said, we do see some upside potential stemming from the ongoing licensing round, which has on offer 13 new oil blocks for exploration. The government is hoping that the current licensing round will reverse the drying up of foreign investment, although even a best-case scenario in terms of investment is highly unlikely to shift current dynamics.

Good Korea Move For Won

Also in our online service this week, we have updated our 2013 and 2014 forecasts for the South Korean won. Following the recent sell-off in the Japanese yen, and consequently the series of currency depreciations we witnessed across the region, including in Korea, the KRW appears to have topped out. Going forward, we believe that the balance of risks are tilted in favour of won weakness and a move towards support at the KRW1,100/US$ level is likely over the coming weeks. A weaker won will be beneficial for South Korean exporters, especially since many compete against Japan.

South Korea – Exchange Rate, KRW/US$

Full analysis on Ecuador, South Korea, and other emerging and developed economies is available to subscribers at Business Monitor Online.