Ecuador president declares 'war on terrorism' despite scant public funds

After a day of chaos that Ecuadoran President Daniel Noboa described as a war against rampaging drug gangs, he declared that his government will not give in to criminal groups and warned that judges and prosecutors helping them will be considered part of their terrorism networks.

The task of returning peace to the nation will not be easy due to limited public funds. Ecuador ended 2023 with a fiscal deficit of US$5.3bn and experts underscore that there are scant possibilities of obtaining financing at present, which will likely affect economic activity and undermine the chances of attracting foreign investment to key sectors as well.

“The country's main problem is crime, and the challenge for the government is how to finance its battle to regain control of the country. This security crisis comes as the State and the government are suffering a crisis of tremendous illiquidity,” Santiago Mosquera, head of research at brokerage Analytica Securities and director of the business school at Universidad de las Americas (UDLA) in Quito, told BNamericas.

On Tuesday, a group of hooded men armed with guns and explosives stormed a television channel in Guayaquil as it was broadcasting live, while in other parts of the country there were car bombings, police officers shot in the streets, vehicles burned with their occupants inside and approximately 140 prison guards taken hostage, with some apparently lynched in gruesome videos seen on social media, as well as many other violent attacks, including at a hospital and a university.

During the wave of violence, the president issued several decrees, one enforcing a nationwide curfew and another declaring an "internal armed conflict", identifying 22 criminal groups "as terrorist organizations and belligerent non-state actors," several of which are linked to Mexican drug-trafficking cartels.

That declaration means that "every terrorist group is a military objective,” the head of the armed forces, Jaime Vela, said after an emergency meeting with Noboa as soldiers were deployed across the nation, adding that Ecuador "will not back down in the face of terrorism."

POSTPONED INVESTMENTS

The events could bring investments by local and foreign groups to a virtual halt, with the resulting negative effects on the economy, which is thought to have grown only 1% last year.

Given the deterioration in levels of confidence, both among consumers and companies, consumption and investment will be affected since households and companies will be much more cautious regarding their spending and investment, depending how long the situation lasts, said Mosquera.

Foreign investors were already looking at a difficult 2024 for Ecuador as another general election will be held in early 2025, so the latest events will certainly not be positive. Analysts consider that foreign investment will likely be limited solely to businesses that need to maintain their current operations. 

Before companies or investors decide whether to make new investments, they will wait to find out what policies the next government will enact. The election is due to take place in February 2025, with the new administration taking over from Noboa's government in May.

Noboa took office in November, after being elected to complete the term of Guillermo Lasso, who dissolved the national assembly last May in the face of an impeachment trial that threatened to remove him. That meant he was obliged to call early presidential and legislative elections for a new government to finish what remained of his term.

Mosquera says that due to the severity of the crisis, local investors could look at markets in other countries to diversify their risk.

“There will not be capital flight, but there will be a decision to invest little in a country whose growth outlook for the coming years is low and which doesn't offer any incentives,” he said.

However, Noboa's decision to declare criminal gangs as terrorists will be of help to various types of businesses around the country, including those in the food and beverages and logistics sectors, which were being extorted by these gangs.

“The government is trying to take control of the State, not only at the prison level but also on the streets, which supports the perception that things can improve. For those who are exploring the possibility of entering Ecuador, this is a time to wait for the State to regain control of security,” Mosquera said.

In terms of foreign investment, the most attractive sectors in Ecuador are mining, oil and electricity, which will have to await new investment decisions, which will probably be made towards the end of 2025.

“Any investor at this time will wait to make decisions because the scenario isn't clear despite the strong decisions of the government. While we don't see any results, including the leaders of the criminal gangs being arrested and the State taking control of certain areas of the country, new investments will continue to be on hold,” Mosquera stated.