Analysis: Empowered Correa has no new shocks for investors

QUITO Mon May 9, 2011 1:19pm EDT

Ecuador's President Rafael Correa (C), joined by his daughter Sofia, addresses the media as they cast their votes in Quito May 7, 2011. REUTERS/Kevin Granja

Ecuador's President Rafael Correa (C), joined by his daughter Sofia, addresses the media as they cast their votes in Quito May 7, 2011.

Credit: Reuters/Kevin Granja

QUITO (Reuters) - Ecuador President Rafael Correa's weekend referendum win is cast as an unsettling power-grab by opponents but may actually pave the way for smoother relations with foreign investors whom he has squeezed in the past.

The leftist Correa has had tempestuous ties with foreign investors since he took office in the small but resource-rich Andean nation in 2007. He has accused some companies of pillaging resources, corruption and pollution.

Like ally Venezuelan President Hugo Chavez, Correa alienated some oil investors by forcing them to give the state more control over operations and a bigger share of revenues.

Brazil's Petrobras (PETR4.SA) (PBR.N) pulled out last year after refusing to sign a less-profitable contract, and in 2009 Ecuador took control of oil fields operated by Perenco, after accusing the French company over a tax dispute.

Correa's seeming poll win -- pending official confirmation at a slow vote-count -- increases his power over judges' appointments and enables him to keep checks on media.

Critics say the reforms threaten the balance of power in the OPEC-member country, but analysts do not believe it heralds another tilt at foreign investors.

"It decreases the likelihood of any radical policies because he doesn't need to rally that kind of national support," said Eurasia Group analyst Risa Grais-Targow.

The consolidation of power also gives investors continuity and clarity about their playing field, with analysts now expecting Correa to seek re-election in 2013.

The referendum amounted to a months-long political showdown. Now that it is over, analysts think Correa will need to temper his stance toward oil and mining companies to fuel economic growth and soothe criticism from educated middle classes concerned the economy is stuck.

They see neighboring countries like Peru becoming more prosperous thanks in part to booming foreign investment. Peru's economy is forecast to expand by 7 percent this year.

"That is the next step for them ... the government (needs) to engage in more planning and to try to increase both public and private investment," said Mark Weisbrot, co-director of the Center for Economic and Policy Research (CEPR) in Washington.

Ecuador is recovering after being battered by the global crisis, and hopes for 5.1 percent growth this year after 3.6 percent in 2010. The forecast growth rate is bellow that of Latin American economies such as Argentina and Chile.

Meanwhile, Correa's high popularity depends heavily on infrastructure spending on roads, hospitals and schools. And since Ecuador was shut out from international debt markets following a $3.2 billion debt default in 2009, his best shot at boosting liquidity is to increase tax revenue from the private sector.

In November, Ecuador won better terms from oil companies in the country, including Italy's ENI (ENI.MI) and Spain's Repsol-YPF (REP.MC). Petrobras refused to sign a new round of contracts that threw out profit-sharing deals to turn foreign firms into flat fee service providers.

"I think in the oil sector he's already gone as far as he can go," added Eurasia's Grais-Targow.

Ecuador is the smallest OPEC member and the output of foreign oil companies in the country accounts for about 25 percent of the 500,000 barrels of crude oil produced a day.

GOOD PROSPECTS FOR MINING

Correa has taken a softer approach to miners planning to develop a handful of large-scale copper and gold projects that would allow Ecuador to diversify its economy from dependence on oil exports and remittances sent by Ecuadoreans living abroad.

The government expects $7 billion in mining investments in the next seven years. After freezing investments in the sector for over a year, officials are now in talks with three miners.

"He is going to offer pretty generous terms initially ... He can't afford to do anything radical because he really needs that foreign investment," said Grais-Targow.

Canada's Kinross Gold (K.TO), Canadian junior Ecuacorriente CTQ.TO and U.S.-based International Resources are due to sign deals by June, and two more companies in 2012.

Laura Zurita, head of Ecuador's Mining Chamber, told Reuters before the vote that delays in starting the projects are costing Ecuador dearly in tax revenues, with officials and miners both eager to sign by June.

"Ecuador needs to regulate the current situation so that it becomes attractive for (more) miners to invest in exploration ... The contracts will mark a new beginning," she said.

Correa is not the only leftist president in Latin America warming up to foreign investors. Bolivia's Evo Morales has also sought to attract more investments from energy companies that froze spending after he nationalized the country's natural gas industry in 2006.

(Additional reporting by Mica Rosenberg in Bogota and Santiago Silva in Quito; Editing by Andrew Cawthorne and Philip Barbara)

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