ECUADOR: An Introduction
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In political and economic terms, 2022 has seen Ecuador progress in recent efforts in relation to: investment, foreign relations, business climate and fiscal stability.
Also, 2021 ended on an economic high note: according to the Ecuadorian Central Bank, the economy grew 4.2%, greatly exceeding the 3% expectations, after the losses seen in 2020. Aside from important growth in petroleum exports, non-oil exports reached historic levels in nominal terms in 2021, especially shrimp, fish, flowers and mining.
Early estimations of economic growth for 2022 are 3.5%, well ahead of other Latin American countries.
The flagship public policy project to streamline foreign and local investment has been the signing of investment contracts. In 2021 and the first quarter of 2022, a record 228 contracts were signed by the government and investors, with projections of USD5 billion in investments and the creation of over 20,000 direct job placements.
Investment contracts are aimed at attracting investors by offering legal stability, alternative methods of dispute resolution and in general a closer and more amicable relationship with the government.
Early signs of success are evident. Foreign investment grew by 21% in 2021. Mining activities have seen a particular increase, both in terms of investment and production, with 2021 being a record year in exports amounting to USD2.1 billion.
The increase in commodities’ value has also had an important and positive impact in the first months of 2022, as the country has increased oil production and received significantly more income than projected (oil barrel price was projected to be USD59.20 in the official central government’s budget).
Enormous success in the vaccination strategy implemented in 2021 has meant that after the first quarter, almost all COVID-19 related restrictions have been lifted, with minimum impact on public health.
With fiscal stability at its core, the increase of government income through exports has been combined with a comprehensive tax reform in the latter part of 2021, which has generated a 37% increase in income tax collected. This increase has been combined with the planned reduction of the cash remittance tax, which will drop from 5% to 4% in 2022 alone in order to lessen its impact on foreign trade.
Ecuador’s continuous collaboration with the IMF has provided an organised and sustainable line of credit for the country, while promoting economic growth and controls on public expenditure.
Public agenda and public policies are expected to continue to be focused on objectives such as:
- Increasing private investment;
- Increasing productivity;
- Reducing the public debt and deficit;
- Promoting investment and job creation;
- Increasing Ecuador’s credibility in foreign markets;
- Increasing revenue from public assets and infrastructure;
- Effective payment of Ecuador’s international obligations; and
- Increasing oil production and promoting responsible mining operations.
Ecuador’s ongoing efforts to increase productivity are also a priority objective in the country’s agenda. As Ecuador uses the US 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.
Stronger foreign policy collaboration between Ecuador and the United States has meant receiving increased assistance in trade and security matters. Trade with the US is key to Ecuador as it is the principal destination for non-oil 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 rejoined the ICSID Convention in 2021 and filed its formal request for admission in January 2022.
A modernised contract law framework has seen the Code of Commerce work favourably to further develop clear and flexible rules for distribution, agency and franchising.
The new limited responsibility company “SAS” corporation is quickly becoming the legal standard for private enterprises, keeping up with neighbouring countries and allowing shareholders to achieve 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 for 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 increase activity in general.
On the energy front, the government is tasked with signing several concession contracts for private companies to increase power generation focused on renewable energy sources. A full change in self-generation rules has brought renewed interest in the sector and will likely see many important projects come to fruition in the near future.
The banking industry is also set for important changes as recent legal reforms have relaxed specific limitations for investment and broadened the definition of financial services, allowing for financial groups to be better integrated.
The incorporation of open and modern regulations to activities tied to fintech is also a main immediate goal, as private ventures in the field are quickly gaining more relevance.
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 registrations for related products. Also, many of these agencies have been implementing electronic filing options, first as a result of the disruption caused by the pandemic and now permanently.
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 reduction in rates tied to spectrum use aims to create a more competitive market. Changes in regulations in other areas such as landing rights for new technologies are also part of the public authority’s agenda.
The M&A market has rapidly gained traction, returning to pre-pandemic levels. 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 for such procedures and international interest remains high.
The Data Protection Law that incorporated international standards and concepts will demand that companies create internal procedures to follow such rules. This will require changes by certain businesses that regularly gather and manage personal information, including changes to internal manuals, policies, contracts, the appointment of data protection officers, and new reporting obligations.
In dispute resolution matters, Ecuador is a signatory of the New York Convention, has a longstanding arbitration law and constitutionally approves of ADR methods in general. International companies have legal assurances that choice of law and jurisdiction clauses are respected in local courts. The last year was especially relevant for Ecuador as it has seen the most meaningful effort to create a better dispute resolution environment in arbitration by the enactment of the General Regulations for the Mediation and Arbitration Law. The effects will be particularly meaningful in public-private relationships as public procurement disputes have been set to go to arbitration as a general rule, breaking a longstanding tendency to submit such disputes to administrative courts. Among the most significant changes, the annulment action has been thoroughly explained, as well as the execution of foreign awards; the ultimate goal is to bring Ecuador up to speed on arbitration rules.