Hot spots: Ecuador.(Business Credit)

President Lucio Gutierrez took office in January 2003 with minimum political experience and few reliable allies. Considering that his two elected predecessors lasted less than 18 months in office, he has already shown remarkable slaying power by the standards of Ecuador. Now, however, Iris political position is becoming increasingly precarious and be is trader growing pressure to abandon the relatively conservative policy course his government has been following.

Three key Cabinet members bolted from his administration for "personal reasons" in April and May. He is finding it ever more difficult to retain the support of the establishment parties, which he once harshly criticized, but on whose backing he has depended ever since the indigenous Pachakutik and other Left-wing groups departed from his governing alliance. With the tide running so strongly against him, more and more observers are coming to the conclusion that his days in office are numbered and that economic policies will change to the point where the country will soon be on the edge of another debt default.

For the time being, such worries appear premature. Gutierrez should be able to hang on for a while longer and default does not seem probable at least for the remainder of 2004. Next year, though, conditions could deteriorate rapidly, making this a country that should be closely watched by companies doing business in and with it. There have been persistent rumors of unrest in the military. Left-wingers and indigenous parties bare been tailing against the government's reform plans and tight fiscal policies. These forces will become louder and more insistent in their demands for stepped-up spending from the public till as the local elections scheduled for October come closer.

The Right-wing majority in Congress has helped Gutierrez tend off threats from the Left to impeach him over allegations that he received illegal campaign contributions, but it has shown little interest in supporting his reform agenda. Mr. Gutierrez has made matters worse by trying to build a political base with the help of blatant nepotism. He has put family members and close relatives into high official positions for which they are clearly not qualified.

Now, he no longer has the political authority to make unpopular measures stick. This will make it exceedingly difficult for him to keep Ecuador in the good graces of the IMF--not because he is unwilling to promise what the Fund wants him to do, but because few people seriously believe that he will make good on his pledges. Ecuador's previous IMF accord collapsed in March, with the country found to have been non-compliant on key issues. An IMF mission was in Quito in May to prepare the ground for a new stand-by deal, but negotiations have been dragging on because the Fund is making tough demands. It wants Ecuador to run a primary fiscal surplus (before debt servicing) of about 5% of GDP, in addition to reforming the whole budget process, the oil and electricity industries and the social security system. But Gutierrez is trader growing political pressure at home to spend more, not less, from state coffers.

Laws governing the so-called oil stabilization fund, which by the end of this year should have accumulated close to USD 500 million, say that 70% of the resources are to be used to buy back government debt, with only 10% to be expended on social programs. Gutierrez, labor Minister, however, has gone public with demands that, in the future, just 40% of the fund's money be used for debt buy-backs and 40% for social programs. Vice President Alfredo Palacios is on record arguing that the government needs to give the "social debt" priority over the financial debt.

Ecuador is benefiting from a number of favorable developments this year, including ...