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ECUADOR: An Introduction

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2018 heralds interesting prospects for Ecuador after a change of government on May 24, 2017 with the election of Lenin Moreno as President and changes in public policy, in particular regarding economic aspects.

The government has made a significant effort to improve the transparency of institutions, highlighting the importance of a separation of powers and guarantee of fundamental rights such as freedom of speech and legal certainty, as part of a wider message that it is opening up to business.

After the economic impact of the decrease in public revenue due to the fall in oil prices, which caused the economy to contract in 2016 for the first time this century, the economy has stabilised since 2017 and growth of 2% is predicted in 2018, in line with the average for Latin America.

Regarding economic management, the government has emphasised the need to reduce the size of the State, eliminating some public entities and merging several regulators in ministries and departments.

Balancing government accounts and determining the value of public debt have been priorities, in conjunction with a planned reduction in public spending. It is predicted that the public debt ceiling equivalent to 40% of GDP, which is currently exceeded, will gradually be stabilised.

To promote private investment—a specific objective of the new administration—a boost in the private sector's role as an important investor is expected, after a decade under the weight of public investment.

To develop these objectives, it has been announced that changes will be made to tax policy to incentivise investment, in contrast to the increased pressure on taxpayers.

Flagship legislative projects for this year include a project to encourage production driven by the government with the following main points: (i) clearance of interest and fines for particular tax obligations, in exchange for payment; (ii) conditional income tax exemptions for productive investments in priority sectors of national interest, including the industrial sector; (iii) conditional exemptions from foreign money transfer tax on certain foreign payments such as the import of capital goods, raw materials and dividends distributed abroad; (iv) reduction to 8% of the applicable income tax rate for share transfers; (v) elimination of the lowest rate of income tax.

Laws geared towards business development are kept in force, such as the Organic Code of Production, Trade and Investment and the Organic Law for Public-Private Partnership Incentives.

When the State has contracted out its investment through typical administrative mechanisms such as the concession of public works and services, it is anticipated that private parties will alleviate the tax burden.

The government has recognised that Ecuador, as a dollarised economy, needs to attract foreign currency to stabilise the balance of payments, signalling a renewed openness towards foreign investors.

Typical sectors of the Ecuadorian economy that attract international attention such as energy resources (oil and mining) continue to be encouraged. The administrative processes for concessions have not seen major changes, but efforts are being made to make these more attractive to foreign investment, in line with the government's general strategy.

Things to consider when entering the Ecuadorian market are the formal and legal comparisons between national and foreign investors under the legal framework and preferences that are only associated with certain public procurement matters.

In regulatory matters, efforts are being made to simplify processes, although some industries have powerful regulators that require significant initial processes such as the food, medicine, agrochemical and telecommunications industries.

In procedural matters, local arbitration for commercial disputes is already well-founded, especially in the largest urban centres. The procedural reforms of 2016 have also helped to decongest the ordinary justice system.

In light of the above, the business environment in Ecuador is more favourable given the public sector's push to increase its collaboration and positive interactions with the private sector, which is clearly encouraging.