The USA identified six obstacles to investment in Ecuador

The U.S. State Department conducted an assessment of the investment climate in Ecuador, and while it highlights fiscal sustainability and the attempt to maintain a favorable environment for foreign investment, it also mentions six challenges that must be urgently addressed to improve the country’s outlook, which are:

• Reputation as a high-risk country;
• Unstable policies and legal complexity;
• Difficult political relationship with the legislature;
• Less public investment due to the crisis;
• Difficulty in attracting transparent and competitive investment;
• Corruption.

STRENGTHS

In the report, the U.S. argues that the country’s dollarized economy is a strength due to few limits on foreign investment and profit repatriation. In addition, “it has a population that generally views the United States positively,” and the administration of Guillermo Lasso has expanded bilateral ties and significantly increased cooperation with the United States.

In addition, the report highlights the surge of optimism following the April 2021 election of Lasso, whose main message has been his administration’s drive to attract US$30 billion in investment during his four-year administration.

Indeed, investment is growing, “with international and domestic companies seeking opportunities in this traditionally protectionist market that once attracted little attention compared to neighboring Colombia and Peru.”

In addition, the Ecuadorian government is taking positive steps to improve fiscal stability. In September 2020, the International Monetary Fund (IMF) approved a US$6.5 billion 27-month Extended Fund for Ecuador and had already disbursed US$4.8 billion to assist in economic stabilization and reform.

“The IMF program is in line with the government’s efforts to correct fiscal imbalances and improve the transparency and efficiency of public finances,” the report notes.

It also states that the Central Bank of Ecuador (BCE) reported “solid GDP growth” of 4.2% in 2021 and projects growth of 2.8% in 2022, demonstrating that “the Ecuadorian government remains committed to the sustainability of public finances and continues on the path of fiscal consolidation.”

A HIGH-RISK COUNTRY

But while those are the positives, the U.S. is clear that there are also major challenges to be faced to improve the economy and the investment environment. For the State Department, the Lasso administration faces significant challenges in its investment agenda “given the country’s long-term reputation as a high-risk country.”

In recent years, Ecuador has taken steps to attract Foreign Direct Investment (FDI). Still, despite this, its overall investment climate remains challenging as economic, trade, and investment policies are subject to frequent change.

From January to September 2021 (latest available information), FDI inflows to Ecuador were US$493 million, a 50% decrease from 2020 levels (US$986 million) and 23% lower than 2019 levels (US$642 million).

The report notes that while no laws or practices discriminate against foreign investors, legal complexity resulting from inconsistent application and interpretation of existing laws and regulations increases the risks and costs of doing business in Ecuador.

In addition, under the administration of Rafael Correa (2007-2017), “disputes involving U.S. companies were politicized, especially in sensitive areas such as the energy sector,” resulting “in several cases of high-profile international investment disputes, with companies awarded damages in international arbitration awards against Ecuador in recent years.”

THE OTHER WEAKNESSES

The first difficulty is the relationship with the National Assembly, which “complicates the passage of necessary economic reform legislation.” For the U.S., while the November 2021 tax reform is an achievement to be highlighted, the Legislature “flatly” rejected the investment promotion bill proposed by President Lasso on March 24, which shows the weak relationship between the two branches of government.

Also, serious budget deficits and the COVID-19-induced economic recession “force the Government to employ cost-cutting measures and limit public investment”.

Regarding investment, the analysis explains that Ecuador has had difficulty structuring bids and public-private partnerships that are bankable, transparent, and competitive, which “has discouraged private investment and attracted companies that lack a commitment to quality construction, accountability, and transparency, as well as environmental sustainability and social inclusion.”

THE BURDEN OF CORRUPTION

Another drag on the country is that corruption remains widespread, and Ecuador is ranked in the bottom half of countries surveyed by Transparency International’s Corruption Perceptions Index. It ranked 105th out of 180 countries and received 36 out of 100.

The United States considers that corruption “is a serious problem in Ecuador, and the Lasso government is confronting it”. In that sense, it highlights the convictions of high-ranking officials, including former President Rafael Correa, former Vice President Jorge Glas, and former Vice President María Alejandra Vicuña, among others.

“U.S. companies have mentioned corruption as an obstacle to investment, with concerns specifically related to non-transparent public tenders, dispute resolution, and payment of arbitration awards,” the report notes.

It also details that although Ecuadorian law establishes criminal penalties for the corruption of officials, the government has not effectively implemented the law, and officials have engaged in corrupt practices.

For the State Department, high-profile cases of alleged official corruption involving the state-owned oil company Petroecuador and the Brazilian construction company Odebrecht “illustrate the significant corruption challenges facing Ecuador.”

Reportedly, “illicit payments for official favors and theft of public funds frequently occur.” In addition, dispute resolution procedures are complicated by a lack of transparency and inefficiency in the judicial system.

With information from Bloomberg