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Economy |
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Impact of Dollarization
Beyond any doubt, the decision to dollarize has been the
most important event for the Ecuadorian economy in recent
years. This process began officially in January 2000 and
marked the beginning of new expectations for the economic
stabilization and development of the country.
 Towards the end of
the nineties, the Ecuadorian government decided to put an
end to its monetary policy. This decision showed the State's
commitment to bringing the country out of the crisis. The
instability and uncertainty surrounding the exchange system
was cut off at the root and this also did away with the
possibility of using devaluations as an artificial mechanism
for increasing competitiveness.
The Gross Domestic Product
Throughout the 1990's, the nominal GDP increased from US$
11,525 million in 1991 to US$ 19,710 million in 1998, which
represents a real growth rate of 2.5%. However, 1999 saw the
beginning of a deep financial crisis which saw economic
activity fall 7.3%. Since 2000 the possibilities for growth
have been limited.
The nominal GDP, in dollars, fell as a result of 1999's
devaluation and recession, but is now at the same level as
it was prior to the crisis. As such, The Central Bank of
Ecuador predicts a level of US$ 20,505 million, which is
equivalent to a level of real production superior to that
observed prior to the crisis. We can also observe the same
pattern in GDP Per Capita.
Economic Growth
In the medium term, Ecuador has many favorable prospects for
growth. Firstly, thanks to increased demand brought about by
the construction of the heavy crude oil pipeline, the
forecast is for a reasonably high growth rate (4%) for the
year 2002. This undoubtedly marks us out as one of the
leading countries in the region. Secondly, despite not
enjoying much success over the previous decade, if we look
at figures dating back to the 1970s it is possible to
forecast another petroleum boom, though on a smaller scale
than that of the early 1970s.
Of course, the sustainability of these projections in the
long term will depend greatly on economic performance in
other fields, which cannot be predicted accurately on the
sole basis of factors of demand.
Inflation
As a result of the devaluation that proceeded the conversion
to dollars, prices suffered a shake up, which has
temporarily produced the country's high inflation. If we
think of devaluation as a temporary deflation of prices
valued in US$, then consequently the level of inflation
afterwards serves, in part, to address the pricing
imbalance. It can be seen that the rate of devaluation is
greater than financial growth and as such, dollarization did
not bring about an immediate end to inflation, as it did in
other countries who opted for similar stabilization
strategies.
However, bearing this in mind, the rate of inflation has
been falling gradually, and it is very probable that in 2002
we will end up with an inflation rate of around 10%. Coupled
with low monthly rates, this puts us on an equal footing
with economies with single-digit rates of inflation
Purchasing power increases
Not only has inflation been reduced, the purchasing power of
the average family income has more than doubled in the
period from January to April 2000. Part of the strategy
adopted by the government is to raise the index of coverage
of the average family wage for medium- and low-income
families. This strategy has been so successful that the
existing levels of around 70% could increase to 75% by
January 2003.
Savings increases
Another aspect that is often played down in the evaluation
of the impact of conversion to the dollar is the role of
savings placed in the private national financial system.
These were valued at less than US$ 2,500 million before
conversion, and yet by mid-2002 they exceeded US$ 4,500
million. This allows us to highlight the growth in income
and savings capacity of both individuals business people in
the Ecuadorian market.
"Country Risk" Reduces
In recent years, the term "country risk" has been introduced
to measure the capacity and willingness of emerging
economies to make repayments on loans in international
markets. Consequently, the index encompasses the Brady debt,
Global debt, Eurobonds and the Global Market debt emitted by
foreign institutions. The current situation in Ecuador has
meant that it is no longer considered such a high-risk
country. In fact, there has been a rapid descent from 1500
points in October 2001 to a little over 900 points in May
2002.
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Main Economic Indicators |
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The impact of dollarization in Ecuador has been important in
obtaining macroeconomic stability and in establishing the
foundation for national economic growth.
Ecuador has experienced an economic reactivation: In 2001
economic growth reached the highest level in the Latin
American region (5.2%).
Fiscal Imbalance
Before conversion to the dollar, public
spending frequently incurred an operational deficit. The
estimates for expenditure turned out to be a lot lower than
its actual out-goings. At the same time, the estimated
income was far superior to the quantity of money that was
actually received. The country had to deal with these debts
in both domestic and international money markets.
Petroleum Principal Source
The production and export of
petroleum is one of the key components of the Ecuadorian
budget. In effect, petroleum and its derivatives generate
over 35% of the country's taxable income, whether through
exports or internal business. This means that there is a
high dependency on the price of petroleum, which dictates
the level of public spending. While the country has not been
able to free itself completely from the link between
economic expansion and the money earned from the price of a
barrel of crude oil on the international market., the
opposite is also true: when the price falls, the Ecuadorian
economy shows signs of a slump or recession.
Tax Diversification
This direct correlation between petroleum
and growth in Ecuador is the opposite of the situation in
economies where an increase in the price of oil produces
signs of recession. The Republic of Ecuador has a policy to
try and lessen the dependency on oil-produced income, but as
yet has not been totally successful in creating new sources
of income. The development of the tax culture within the
populace could possibly be an instrument to help the country
break free from its dependency.
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The Foreign Sector |
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Current Account Transfers
Current account transfers, which have
been increasingly favorable since 1994, have been crucial in
rescuing Ecuador's balance of payments. In 1994 transfers
stood at US$ 322 million, but had reached US$ 1,544 million
by 2001. This income represents money sent by Ecuadorians
living abroad, who give financial support to relatives in
the country. Without this income, the liquidity of Ecuador's
banking and financial system could have found itself in
serious difficulties, and possibly impinged on the level of
economic activity within the country.
Foreign Direct Investment
 Ecuador, like other South
American countries, witnessed a huge increase in the influx
of capital during the 1990s. Foreign investment in
particular shot up during this period. In the first half of
the decade, the average was US$ 362 million, and in the
second half this average increased to US$ 664 million. This
rise in foreign investment could be put down to the
macroeconomic stabilization reforms that took place during
those years.
FDI: by sector
Despite this increase in FDI, it is still heavily centered
on mining and the petroleum sector. It is worth highlighting
that with regards to the concentration of FDI, Ecuador has
produced an average of US$ 700 million, even in 1999, the
year of the financial crisis. Foreign investment's
independence from the gross domestic product reveals an
interesting characteristic of FDI in Ecuador.
FDI: by country of source
With regard to the source of Foreign Direct Investment, we
can observe that more than 50% of FDI comes from the USA and
Canada. This is not so surprising if we bear in mind that
there is also a high concentration with regard to the
destination of this investment. If the investment goes
towards financing projects in just one sector, then it is
hardly surprising that companies making these investments
should have their central office in just one country in
which the specific nature of business risks is well known.
In this particular case, these countries are Canada and the
USA, which have the greatest tradition of investment in the
Ecuadorian oil industry.
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Reasons to invest in Ecuador |
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We continue by presenting a
collection of reasons why we believe that Ecuador forms an
attractive option compared to the alternatives available in
other developing countries. Furthermore, it is our opinion
that in the near future, opportunities for growth will
improve further, which will put us in an even more
competitive position.
Con respecto al Medio de Cambio
In Ecuador, the 'dollarized' economy means that the problems
inherent in using local currency as a means of exchange can
be avoided, and the exchange-rate risk that greatly
complicates long-term project planning is eliminated. This
is no small advantage, given the major financial problems
that devaluations have traditionally caused in developing
countries.
Ecuador's exchange system is no longer hindered by an
unstable currency prone to inflation and, as a result, risky
in terms of choosing to do business here. A 'dollarized'
economy is, therefore, the perfect system for lending
credibility to our monetary mechanisms, since they are no
longer controlled by us.
Freedom of Capital
Ecuador possesses a totally free economy with regards to the
entry and departure of capital, and this facilitates trade
and foreign investment. Together with 'dollarization' it may
be a catalyst in the investment process, given that the
problem of devaluation no longer exists. We believe that at
present this situation is not a unique characteristic in
this region, but it probably will be in the future, given
the tendency in all developing countries to resort to
capital control following exchange rate and financial
crises.
The Trading of Goods
Ecuador is a relatively accessible country with regards to
goods and services. Since the beginning of 1990 it has had
an average customs duty of 10%. Since 1995 it has belonged
to the Andean Customs Union, in which a common external
tariff and free trade within member countries are
established. This makes Ecuador a strategic spot for access
to a market of around 110 million people.
Foreign Investment
In Ecuador, non-discriminatory treatment of foreign
organizations is guaranteed. Furthermore, it considers
awarding nationality to those that provide relevant services
to the country.
Regarding investment in particular, the State guarantees
national and foreign capital that is invested in production
aimed especially at domestic consumption and export. This
provides the foreign investor with a favorable status.
In Ecuador we recognize the possibility of awarding tax
incentives for those less developed areas. These are
implemented in free trade zones and are starting to be used
as active tools of economic policy in order to attract both
foreign and local investment to certain parts of the
country.
There exists special legislation that protects the foreign
investor. The Investment Guarantee and Promotion Law
concentrates on allowing the foreign investor to draw up
foreign investment contracts with the State, in order that
legal regulations applicable to the company operating in the
country remain unaltered.
All foreign investors registered in Ecuador with more than
US $500,000 are eligible for the option of tax stability.
Tax stability consists of the possibility of choosing the
income tax rate currently in force
Our Natural and Geographical Resources
It is relevant to mention here the major biodiversity of
natural resources that Ecuador possesses, a result of the
advantages it has regarding geographical location and
climatic regions (Coat, Highland, Jungle, Amazon and
Galapagos Islands) compared with other countries. This
diversity means that our products, especially our
agricultural products, possess characteristics that are
unique in the world. Well-known examples of these include
fruit, vegetables, and flowers, which have gained worldwide
recognition for their excellent and matchless quality. These
products would easily satisfy even the most demanding ISO
standards and certifications.
Ecuador's geographical location is both unique and
strategic. It is equidistant from the US and Canadian
markets, which enter via the ports of California, and from
the Chilean and Argentinean markets, which can be satisfied
via the port of Valparaiso. Ecuador is also significantly
closer to Asia than many other countries wishing to access
Asian markets.
In order to increase our country's attractiveness in terms
of tourism and its strategic location, several
infrastructure and highway construction projects are
currently being set in motion. At present, two modern
international airports are being built in the cities of
Quito and Guayaquil, the basic objective of which will be to
increase capacity for the arrival and departure of people
and goods, all under the world's most stringent standards of
quality control. In the same way, other projects are
underway, such as the inter-ocean maritime-land route, along
which merchandise will be transported from the Pacific coast
in Ecuador to the Atlantic coast in Brazil, and the pan
American cable project, which involves the laying of an
underwater cable connecting nine American countries: Chile,
Peru, Ecuador, Panama, Colombia, Venezuela, Aruba, Saint
Croix and Saint Thomas.
In the field of safety, Ecuador has traditionally been
considered an oasis due to its notable ability to fend off
outbreaks of armed uprisings. This, together with
Its geographical wealth and emerging tourist development, is
why Ecuador can offer the conditions for quality of life
that are difficult to find elsewhere. Here there is a
balanced blend of natural beauty, history, folklore,
modernism and the comfort of first-class accommodation, all
under the cover of cities that are responding positively to
the evolving influence of globalization.
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Sectors & Projects to invest |
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Tourism
The activities of the tourist sector have an ecological
focus, whether in Ecuador's beach resorts, highlands or
jungle. Of Ecuador's five tourist clusters, the Galapagos
Islands exclusively offer eco-tourism, the jungle
principally offers eco- and cultural tourism, and the beach
offers eco-tourism and beach tourism with less emphasis on
archaeological and business tourism. The Andean cluster,
both in the north and in the southern region of Austro,
concentrates on historical, ethnic and cultural tourism.
Agribusiness and Forestry
Thirdly, the timber trade takes
advantage of the natural resources of both public and
private forests. This area also covers mangroves, which more
precisely belong to a bio aquatic system. Although the
Forestry Authority of INEFAN has issued a prohibition on the
exploitation of certain types of wood in danger of
extinction, there are generally no regulations regarding the
types of wood grown in forests planted by private investors.
Mining
The second sector in which we wish to strengthen
investment is in the field of mining. The main product in
this group is, without doubt, gold, which is currently
exploited in Ecuador on a small, semi-industrial scale, with
very limited presence of gold companies. The region of
Nambija, the province of El Oro and the lower part of the
provinces of Caņar y Azuay stand out as the regions with
least prospects. There are, however, other sectors, such as
iron, silver, copper, pumice stone, limestone, and clay,
amongst other products, that require much more thorough
analysis. It has also been suggested that Ecuador possesses
considerable reserves of radioactive minerals, something
that deserves further investigation.
Fishing
The fourth part of the National Plan for Investment
aims to stimulate the marine and fish-farming sectors. This
second category is growing and consists of various sub
sectors such as tuna fishing, the industrialization of fish
meal, industrial shrimp farming and the farming of other
species, such as crab, freshwater lobster, etc. It is worth
highlighting that the intentional cultivation of shrimp and
tilapia, for example, are new categories in this sector.
When we refer to the marine sector, we basically refer to
the intentional cultivation of shrimp for exportation. This
final sector represented more than $800 million annually in
Ecuador's export products, but suffered a reduction to
around $300 million as a result of the 'white spot' disease
that affected the country's shrimp farms. With farms at high
altitude, and with the arrival of methods to strengthen
shrimps' immune systems, this activity has experienced
something of an upturn, which once again opens the doors to
investment in the field.
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