FACTBOX-Key political risks to watch in Ecuador

QUITO May 3 (Reuters) - Ecuador's President Rafael Correa is likely to win a referendum this month that will let him revamp the judiciary, a move his political foes say could pave the way for authoritarian rule by the leftist economist.

Correa has regained his political bearings since violent police protests against cuts in public spending rocked his government last September in what Correa described as an attempt to overthrow him. [ID:nN30130945]

All polls show Correa will sail to victory in a May 7 vote on 10 reforms aimed at shaking up the justice system and limiting media ownership, as well as passing rules banning activities such as bull-fighting and gambling in casinos.

The reforms will give Correa and his allies a bigger say in the appointment of Supreme Court judges in the OPEC member nation. His critics say the reforms will give him excessive control over the judiciary. [ID:nN27171196]

Correa expelled the American ambassador last month over U.S. diplomatic cables released by WikiLeaks that alleged corruption in the police force and suggested Correa was aware of the corrupt practices. [ID:nN05119498]

Washington responded evicting the Ecuadorean envoy in the country, but Foreign Minister Ricardo Patino later said he would like to patch up relations with the United States, the country's largest trade partner. [ID:nN07124915]

Speculation is rife in the Andean country that the diplomatic spat may prompt U.S. lawmakers not to renew a regional trade preferences deal that expired in February.

A judge ordered Chevron (CVX.N) in February to pay $8.6 billion to clean up pollution at old drilling sites in the Amazon. Chevron denies the charges, and the 17-year-old legal saga looks far from over as both sides appeal. [ID:nN25225194]

Following are political risks investors should watch:

REFERENDUM

Correa says the ballot is aimed at reforming the court system, which is widely seen as corrupt and inefficient. But opposition parties and even some former allies call it a power grab, since it would give him more say in selecting judges. [ID:nN16293199]

Correa's popularity rating is above 50 percent and all polls show he will win the referendum, which would also introduce rules that critics say threaten media freedom.

Correa is part of a South American leftist alliance that includes presidents Hugo Chavez of Venezuela and Evo Morales of Bolivia, who have changed laws to boost their power.

What to watch:

-- Slim support for the two reforms that his foes say would allow him to silence criticism for his policies in the media

-- Signs middle class voters worried that Correa is eroding the separation of powers may be turning their backs on him

POLICE AND MILITARY

The government's relations with the police remain tense. The Sept. 30 mutiny revived memories of the country's volatile history and concerns about stability in the oil producer.

Soldiers are temporarily in charge of guarding Congress and other key sites, a task that the police used to have.

Ecuador's military calls the shots during crises and the police mutiny was no exception. Correa appears to have promised the military new equipment, but the soldiers' assertiveness may temper some of his policies -- or further undermine stability.

Three presidents were ousted in the decade before Correa took office in 2007. The military often played a critical role by refusing to assist the leaders being buffeted by protests.

Last September, troops rescued Correa from a hospital where he was being held by angry police officers -- but the army waited hours before making its move.

Correa has kept military chiefs happy with salary hikes and appointments to cushy state jobs. But Correa briefly looked vulnerable and the military could try to use that to pressure him for more concessions.

What to watch:

-- Signs of further unrest in the police force

-- Demands by the military as Correa's support wobbles

PUBLIC FINANCE, INVESTMENT CONFLICT

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]

The government may try to return to the international debt market with a bond issue toward the end of this year.

Considering its past defaults, political instability and the president's tempestuous relationship with the private sector, it may have to pay very high yields. [ID:nN22115400]

Correa is keen to kick-start a nascent mining industry in a bid to diversify the economy from its dependence on oil exports and money sent by immigrants living abroad.

The government expects $7 billion in mining investments in the next seven years, and officials are in talks over operating contracts that would allow five mining investors to develop several large copper and gold projects in southern Ecuador.

Natural Resources Minister Wilson Pastor said in March that Canada's Kinross Gold (K.TO), Canadian junior Ecuacorriente CTQ.TO and U.S.-based International Resources (IMZLF.PK) will sign agreements by June and two other deals should be completed next year. [ID:nN2937519]

A law allowing the government to expropriate private land deemed idle could be passed. Such tracts would later be transferred to indigenous and peasant farmers. [ID:nN24138622]

What to watch:

-- Negotiations with miners dragging on

-- Moves to re-enter global capital markets

-- Additional financing deals with China or India

ECONOMIC RECOVERY, CHEVRON COURT CASE

Ecuador is slowly recovering after being battered by the global recession, and the central bank estimates the economy grew 3.6 percent in 2010.

A minister said in March that the economy was expected to expand by 5.1 percent this year and the government has already hinted it may raise its economic growth outlook on higher oil prices. [ID:nN28191670]

Its dollarized economy is dependent on greenback inflows for spending and has suffered from falling private investment due to Correa's skirmishes with business.

In November, Ecuador won better terms from oil companies that operate in the country, including Italy's ENI (ENI.MI) and Spain's Repsol-YPF (REP.MC).

Brazil's Petrobras (PETR4.SA)(PBR.N) refused to sign a new round of contracts that threw out profit-sharing deals to turn foreign firms into flat fee service providers. [ID:nN26118806]

February's court ruling in favor of Amazon residents suing Chevron for pollution brought global attention as one of the biggest ever environmental damages cases -- but it looks set to drag on since both sides have appealed. A handful of other lawsuits round the world that relate to the case further complicate the 17-year-old saga.

What to watch:

-- The government may raise its economic growth forecast

-- Signs oil investment may pick up under new rules

-- Possible dollar outflows that may destabilize banks

-- Further legal rulings and moves in the Chevron case (Writing by Eduardo Garcia; editing by Anthony Boadle)