ECUADOR: An Introduction
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Ecuador began 2021 with hopes to jump-start the economy after the losses of 2020, and has welcomed a new President, Mr. Guillermo Lasso, who took office in May.
The last four years being focused on ensuring legal and fiscal stability to attract foreign investment as a crucial element of public policy, the new administration is tasked with continuing these efforts to further secure foreign investment and important financing.
The government’s first actions intend to create the best possible business climate, with initial executive orders aimed at: (i) launching a mass vaccination effort; (ii) reducing regulatory hurdles for administrative procedures and imports entering the country; (iii) rejoining the ICSID Convention.
Regarding the government response to the COVID-19 emergency, the vaccination plan for 2021 is already underway to enable the resumption of productive activities. The initial goal is to vaccinate 60% of the adult population by the end of September.
Ecuador’s GDP took a significant hit in 2020, falling by an estimated 8%, but preliminary figures for 2021 estimate growth of 2.8%.
After a second round of mostly full-on lockdowns between March and May, the government has opted for less restrictive measures controlled by local authorities. Therefore, public and private activities in most sectors are expected to carry on in 2021, with the public sector workforce progressively returning to offices as vaccination progresses.
Since Ecuador lacks stimulus packages due to the economic contraction, it has enacted important legislation, especially concerning labour rules to aid private entities. The new emergency and productive contracts have very important provisions to promote employment but with flexible terms and indemnification that reduce risks for employers. Remote work has gained importance and prompted technification in many areas. Accordingly, labour regulations have also been updated to clearly outline new working conditions.
The IMF’s help in covering a significant public deficit has also led to significant efforts to cut unnecessary public expenditure. The extraordinary events in 2020 have also meant the elimination of public agencies alongside efforts to reduce regulatory requirements.
A combination of promotion of private investment as a means to revamp the economy and more technical controls of public spending have improved the external perception of Ecuador and have been the basis for agreements with external entities such as the IMF.
Under the new administration, the public agenda and public policies are expected to be focused on objectives such as:
- Increased productivity.
- Reduced public debt and deficit.
- Income tax exemption for new investments.
- Promote investment and job creation.
- Increase Ecuador’s credibility in foreign markets.
- Increase revenue from public assets and infrastructure.
- Effective payment of Ecuador’s international obligations.
- Increased oil production, promote responsible mining operations.
Ecuador’s ongoing efforts to increase productivity is also a priority. As Ecuador uses the U.S. dollar as its currency (which is credited with providing economic stability), it is crucial to increase its participation in foreign markets with competitive local products. The commercial treaty with the European Union continues to bring important opportunities in that regard.
Moreover, in December 2020, negotiations for a commercial agreement between Ecuador and the United States, headlined by the Office of the United States Trade Representative, have led to an initial phase agreement. The United States is Ecuador’s principal destination for non-oil related exports, and favourable conditions are key to local industries.
Ecuador has also shown interest in joining the Pacific Alliance with Chile, Colombia, Mexico and Peru. As part of that effort, Ecuador is rejoining the ICSID Convention.
Important legal reforms, like those to the Code of Commerce which incorporated regulations for several contracts previously ignored by Ecuadorian law in the fields of distribution, agency and franchising, continue to strengthen commercial relations within the country and with foreign counterparts.
A legal reform to the Companies Law to include the new “SAS” (simplified stock) corporation has prompted a wave of incorporations of companies free from past restrictions such as notarial and registration expenses and delays in authorisations. These reforms have also updated important aspects of corporate law in Ecuador to keep up with neighbouring countries and to allow shareholders to include truly binding shareholders’ agreements and, in general, better corporate governance.
Due to the need to cover the deficit, several public entities have continued to promote private investment by implementing strategies such as concessions of public works and public-private partnerships. Concessions of public infrastructure have been announced as part of these efforts, and interesting developments are expected.
In the hydrocarbon industry, the government expects to increase production and has entered into several contracts with private companies, offering incentives for investments that allow incremental production. A potential recovery of international oil prices, if the expected increase in demand exists, would also bring important income and would increase activity in general.
The mining industry has been slowly advancing with many important international players setting up shop in the country. Both public and private entities have been acknowledging the importance of developing this industry, with a more peaceful coexistence between miners and environmental activists. Gold and copper are the most prominent resources in the country. In 2020 exports increased and mining was one of the few industries which grew to some extent. Projections for 2021 indicate a 70% jump from the year prior.
Although some industries have powerful regulatory agencies that require significant initial licences, such as the food, medicine, agrochemical and telecommunications industries, important reforms aim to expedite most day-to-day procedures, incorporate electronic filing and waive certain requirements. This has been especially palpable in the pharmaceutical industry and the sanitary registration of such products. Also, many of these agencies have been implementing electronic filing options as a result of the disruption caused by the pandemic.
In the telecommunications market, the government aims to increase internet access. A recent reform of the Telecommunications Law offers advantages to tech companies and reduces the rates for spectrum use, among other measures.
The M&A market was on hold for most of 2020 but resumed in 2021. The acquisition of medium and large local companies by foreign investors seems to be a prevalent and important trend. Local parties have gained important knowledge in the last decade on such procedures and international interest remains high.
Ecuador is also seen as a developing market for app-based businesses and fintech, with some regional and local players seeing success. While no specific legislation exists to date, the new administration is seen as keen to allow these industries to prosper alongside more traditional ones.
Similarly, the much delayed Data Protection Law was unanimously passed into law in May. This law is generally in line with international standards and concepts and allows local companies to implement internal processes over the next two years. This will require changes by certain businesses which regularly gather and manage personal information, including changes to internal manuals, policies, contracts, appointment of data protection officers, and new reporting obligations.
In dispute resolution matters, Ecuador is a signatory of the New York Convention, it has a longstanding arbitration law and it approves of ADR methods in general. International companies have legal assurances that choice of law and jurisdiction clauses are respected in local courts. The local court system has been challenged by the COVID-19 emergency and has had some trouble adjusting to electronic means, but it is gradually returning to pre-emergency levels of response.