FACTBOX-Key political risks to watch in Ecuador

QUITO, Dec 2 (BestGrowthStock) – Ecuador has calmed down since
hundreds of police officers mutinied on Sept 30, causing deadly
riots and surrounding leftist President Rafael Correa for hours
in a Quito hospital where he had taken refuge.

But investors are watching for any more signs of unrest as
the violence revived memories of Ecuador’s volatile history and
concerns about stability in the OPEC-member nation.
[ID:nN30130945]

The role of the military, a struggling dollarized economy
and a possible move by Correa to dissolve Congress, rule by
decree and call elections are all points to watch this year:

CORREA’S FIGHT WITH CONGRESS

Just before police rioted over public sector bonus cuts,
Correa had threatened to disband Congress. Although he has
since backed away from the move, it remains an option that
would allow his government to push through legislation,
including tough new rules for investors. It would also anger
Correa’s opponents and raise the risk of new protests.
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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. His government says the mechanism is designed to help
break political deadlocks in 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 opponents, including members of
his own party, has stalled key bills and came to a head over a
law cutting bonuses for police, soldiers and other public
sector workers as part of an austerity plan.

The police protests led to eight deaths as army commandos
stormed the hospital where Correa was being held by the
dissident officers.

MILITARY

In moments of crisis, the armed forces call the shots in
Ecuador. Sept. 30 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 buffeted by popular protests. On Sept 30 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.

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 briefly looked vulnerable to Ecuador’s traditional
volatility and the military could yet try to use that 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 above 50
percent.

PUBLIC FINANCE, INVESTMENT CONFLICT AND OTHER LAWS

After excluding itself from debt markets by refusing to pay
$3.2 billion in global bonds two years ago, Ecuador has met its
financing needs via bilateral loans and credit, mostly from
China. [ID:nN04220951]

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 opposed by large land holders.

CLAMPDOWN ON THE OPPOSITION

Correa says opposition leader and ex-president Lucio
Gutierrez infiltrated the police protests with the intention of
toppling or killing him.

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.

ECONOMY

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 inflows of greenbacks to cover spending and has suffered
from falling private investment as Correa battles with
business.

The government expects economic growth of about 5 percent
next year and inflation of around 3.7 percent. It also sees an
average oil price of $73.30 per barrel in 2011.

Ecuador, which holds the rotating presidency of OPEC this
year, forecasts total crude production of 181 million barrels
in 2011 of which 126 million barrels will be exported.

OPEC will hold its final meeting of the year in Quito on
Dec 11. [ID:nN29219137]

Private sector sources say September’s political turmoil
could further chill investor sentiment. But fears of a run on
banks following the crisis have not materialized.

In November Ecuador, which holds OPEC’s rotating presidency
this year, won better better terms from petroleum companies,
including Italy’s ENI (ENI.MI: ) and Spain’s Repsol-YPF (REP.MC: )
that operate in the country. Brazil’s Petrobras
(PETR4.SA: )(PBR.N: ) refused to sign a new round of contracts that
threw out old profit-sharing deals in favor of turning foreign
operators into flat fee service providers. [ID:nN26118806]

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.
(Editing by Kieran Murray)

FACTBOX-Key political risks to watch in Ecuador