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                The massive forest fires that have just caused more than a million acres in the center and South of Chile to go up in flames, the worst in the history of the country, covering an area greater than that of Rhode Island, have not yet been fully assessed in terms of the impact they have had on the economy as a whole. Promoted by tinder-like conditions fostered by historically hot conditions and an almost decade-long drought, they have hurt the cellulose and forestry industries and have caused some damage to agriculture (especially wineries), not to mention that they have destroyed an estimated 1,500 homes. The government, though, thinking that the devastation will cost it roughly USD 333 million, can allocate USD 100 million from the current budget, according to Finance Minister Rodrigo Valdes, and take USD 233 million out of the rainy-day fund it maintains for just such emergencies.  The forest industry, one of the nation’s principal export sectors, should be able to cope with the USD 350 million in losses it is estimated to have sustained.
                Even without the added problems, though, economic growth has remained sluggish in recent months, with the primary sector, in particular, finding it difficult to make any headway. Activity as measured by the Central Bank’s IMACEC (Monthly Indicator For Economic Activity) was up just 1.2% in December over a year earlier, and this gain could be registered only because advances in the services and commercial sectors offset contractions in mining and manufacturing. True, the business confidence index (Indicador Mensual de Confianza Empresarial or IMCE), published by the Universidad Adolfo Ibanez, rose last month to 44.9 from 41.5 in December, offering the best reading in almost a year. But the rise still left it substantially below the 50 point level marking the threshold between pessimism and optimism.
                This was no doubt one of the reasons prompting Banco Central to cut its policy interest rate to 3.25% from 3.50% at its January 19 meeting. Another was that – while consumer prices ticked up a relatively hefty 0.5% in January over December – annual inflation was just 2.8% and thus had increased only marginally from 2.7% in December. Monetary erosion is, and will likely remain, well within the CB’s target range of 2%-4%. Heralding a further policy easing down the road, the Bank accompanied its January rate cut with a statement to the effect that “if the recent trends of the economic scenario persist, and so do their implications for the medium-term inflation outlook, it will be necessary to boost the monetary impulse.” For all of 2016, the IMACEC registered just 1.5% growth, the worst showing since 2009. On present indications, the outlook for 2017 is not much better.
From a socio-political perspective, it should not be overlooked that a number of the many forest fires that have caused so much devastation have been the result of arson by Left-wing extremist groups. Even the government admits this. It has arrested at least two-dozen people in the course of an investigation. Officials like to claim that by far the majority of the blazes were caused by accidents and by homeless people, but Interior Minister Mario Fernandez has conceded that the government is not ruling out terrorism “in some cases.” This is an alarming development that the strongly Left-leaning administration of President Michelle Bachelet does not appear to view with the necessary seriousness. Chances are she will continue to downplay the extremists, who claim to represent the indigenous Mapuche. This is, after all, the time when political parties are selecting their candidates for presidential elections next November, in which Bachelet’s Left-oriented reform agenda will hang in the balance. So, Left-wing terrorism at this point is a rather inconvenient reality .
                President Evo Morales says he confidently expects growing reserves of natural gas, especially in the Southern part of the country, in Chuquisaca, to help the economy to a much better result in 2017 than in 2016, when it gained – not by the 5.0% Finance Minister Luis Alberto Arce had predicted early in the year – but by about 3.5% due to soft global commodity demand and prices. There is cause for being a bit more pessimistic than that, although the country should be able to match and perhaps slightly surpass last year’s performance. Some of the grounds for caution are international. This includes continued relatively subdued market conditions for natural gas (which follow trends in oil trading) and an overvalued exchange rate for the peso (at around 6.95 bolivianos per dollar, exporters and domestic producers of goods other than natural resources are disadvantaged). Other reasons are strictly homegrown, such as a large and growing fiscal deficit and a painful shortage of water (due to a lack of investment in the sector), which since the onset of the rainy season last December has so far been only partially alleviated.
                Then there is political uncertainty owing to President Morales’ decision to permit his Left-wing Movement For Socialism (MAS) to name him as its candidate for the next elections in 2019. A former llama herder and coca farmer, he has already won three sweeping victories with strong backing from peasant farmers, labor unions, and urban migrants. A year ago, on February 21, 2016, to be exact, the country’s voters rejected in a referendum a constitutional amendment that would have removed Article 168, allowing Presidents and Vice Presidents to put themselves forward for re-election only once (a court ruling said that his first term did not count because it took place under a different constitution). The defeat was narrow, however, with 51.3% of the vote against 48.7%, and Mr. Morales has evidently had second thoughts after first accepting the outcome.
                MAS is now looking at several options, including holding another plebiscite, or asking parliament to change some parts of the constitution, or having the President step down six months early to avoid having had a full term in office. His advantage is twofold, in that the political opposition is fragmented and no one within the MAS has the stature to challenge him seriously. What all this means in practice is that private (especially foreign) investors will be hesitant, but the government will sustain its outlays on infrastructure such as hospitals and schools and its financial support for the poor to curry favor with the voters, the budgetary red ink notwithstanding. This does not change the fact that popular discontent with Mr. Morales is mounting as his regime can no longer deliver economic results as before. Several of the President’s Leftist allies in the region have recently experienced what this can mean in practice, from Cristina Kirchner in Argentina to Nicolas Maduro in Venezuela, Dilma Rousseff in Brazil and even Rafael Correa in Ecuador (q.v., below), who is about to leave office. The odds are better than even, though, that the fates of these colleagues only spur Mr. Morales to make sure that he can cling to power, as Daniel Ortega has done in Nicaragua.
                The economy finished 2016 on a soft note, although the most recent available numbers show that the decline in real GDP slowed to an annual 1.6% in the third quarter from 2.2% in the second. Forces currently at work – among them still-low oil prices, an excessively expensive foreign-debt burden, the government spending priorities that had to be set after last April’s earthquake, and the strength of the greenback harming the competitiveness of Ecuador’s dollarized economy at a time when the currencies of neighboring countries are debased and weak – would seem to suggest another slippage of gross domestic product in 2017, by up to a full percentage point. What will determine the outcome more than anything else, though, will be the result of next Sunday’s elections for a new President and members of the 137-seat National Assembly.
                This is the first time in a decade that the ruling Alianza Pais is not lining up behind the incumbent Rafael Correa, but is backing former Vice President Lenin Moreno. Were he to win, economic policy would remain largely unchanged, which could be a problem in the face of rising US interest rates (keeping the dollar strong) and prevailing conditions in the international oil markets. The critical question is whether he will win a first-round victory by gathering more than half the popular vote, or at least 40% of the vote plus a ten-point lead over his closest rival. If not, the opposition parties could rally around the candidate who will face Moreno in a run-off (it would be held on
April 2), with a better chance of defeating him. The opponent then would be either Guillermo Lasso of the Creando Oportunidades party (CREO), or Paco Moncayo of the Izquierda Democratica (ID), or Cynthia Viteri of the Socio-Christian Party (PSC).
                During the campaign, Guillermo Lasso has promised to promote more private investment and create jobs to lower unemployment. He has said he would lower taxes and reduce the government’s role in the economy. Paco Moncayo has had a populist message, vowing to cushion Ecuadorians better against the effects of the economy’s difficulties and to place more responsibility for this on the private sector. Cynthia Viteri, in pledges not too different from those of Lasso, has said she would reduce a number of taxes and duties and find ways to stimulate inbound foreign investment, inter alia by making labor regulations more flexible and business-friendly. The problem is, were any of the opposition leaders to become the next President, he or she would be confronted by determined resistance from AP lawmakers in the National Assembly, where the Alianza Pais almost certainly will retain at least a plurality. Lenin Moreno would find it much easier to deal with the legislature, but he would be far less inclined to push for the market-oriented policies Ecuador needs.
                In any event, it will be good for the country to be rid of Rafael Correa, who early in his days at the helm of the nation was hailed as one of the more pragmatic Leftists among those carried to power in Latin America’s “pink tide.” He offered political stability in what traditionally had been a very volatile nation and was prudent in channeling most of the windfall from then-booming oil export earnings into fixing the infrastructure and alleviating poverty. Of late, though, he has shown more and more of the traits of a tinpot dictator, seeking to muzzle the press, bullying the opposition, and proudly offering shelter to WikiLeaks founder Julian Assange. The elections give Ecuadorians an opportunity to decide between policy continuity and a turn to more market-oriented policies, but either way the next person in charge will have to deal with a country in dire need of a tighter fiscal belt and facing mounting interest payments on the foreign debt. On the positive side, exports to the European Union should continue to pick up, following the implementation of Quito’s free-trade agreement with Brussels. Inflation will remain virtually non-existent so long as the economy stays dollarized.