ECUADOR: An Introduction

Changes in Government 

The current Ecuadorian government began its administration with a clear intention to boost the local economy by facilitating conditions for foreign investment and, in 2022, Ecuador showed signs of economic recovery. During 2023, however, Ecuador has seen significant political change, including an unexpected upcoming presidential election. This was caused by a constitutional decision to eliminate the National Assembly (Congress) due to majority opposition, and it has prevented President Guillermo Lasso from advancing his government’s agenda.

During the first quarter of the year, sectional elections took place. Along with the election of authorities, the government presented a referendum including questions related to politics, security and the environment. Most of the population rejected the questions posed by the incumbent president, and the party of former President Correa obtained a significant advantage over other political parties in this election.

An investigation of a virtual news portal resulted in an impeachment process against President Lasso, alleging corruption in state companies. The National Assembly requested, and the Constitutional Court admitted, a petition for impeachment of the president. During this process, President Lasso presented his defence against all allegations and, prior to concluding the impeachment, the president issued an executive decree dissolving the National Assembly under Article 148 of the constitution. This means that new elections for the president and National Assembly members must be held within six months. During this period, the president will govern by issuing executive decrees, subject to the Constitutional Court’s approval.

While the National Assembly was in office, priority was given to the treatment of different proposals on labour matters, with the aim of replacing the current Labour Code with a new regulation. There was also an initiative for a law regulating communities and nationalities, a new Water Law, and changes to the Law Against Unfair Competition. These projects will have to be put on the agenda of the new National Assembly.

The Main Legislative Developments Under the Current Government

Some of the regulations that were issued during the first six months of Lasso’s presidency included reforms to the Labour Code, with new provisions regarding replacement regulations, the division of the ordinary working day and ineffective dismissal. In addition, the Youth Law promoted the introduction of young people (between 18 and 29 years old) into the workplace, prohibiting discrimination against them. The Violet Economy Law promotes the inclusion of women in job roles and on boards and it also regulates maternity and lactation leave. The Law for Human Care includes important reforms in terms of paid and unpaid permissions and leave. It also contains provisions on job stability for women during pregnancy, childbirth, puerperium and lactation, and on the prevention of harassment in the work environment. In other areas, the main legislative developments included:

1. The Law for the Defence and Development of the Peasant Family Economy which contemplates regulations on the use of original seeds, fertilisers, good commercial practices and fair-trade principles.

2. Reforms to the Law on Transparency and Access to Public Information, including the definition of public and private regulated entities, and the confidential information that public institutions must make available to the public through their web pages.

3. The Organic Law for Digital Transformation, which introduces several novel regulations to the local legal system, including definitions of digital services, digital identity and digital domicile. It also includes tax benefits for media productions and the digitalisation of notarial and judicial services.

4. The Law for Business Optimisation and the Promotion of Corporate Governance, including important changes to the existing Companies Law, such as the possibility to incorporate a company through a unilateral act, the possibility to pierce the corporate veil via an arbitration award, expedited liquidation processes, and new rights for minority shareholders.

Prior to dissolving the National Assembly, the president of the republic announced the productive investments to be made in 2023, that is, social investment, investment in security, and investment in public infrastructure.

Ecuador’s Economic Outlook 

According to Moody’s credit rating, Ecuador maintains its debt rating, with a stable outlook for two consecutive years. However, the country continues to face significant credit risks, implying limited sources of financing and weak governance.

The Banks Association of Ecuador (“Asobanca”) reported that, according to the Central Bank, Ecuador’s economic outlook for 2023 will slow down based on the following issues:

1. the decrease in oil exports;

2. less dynamic household consumption;

3. the deceleration of the main trading partners of the country; and

4. the political instability caused by the impeachment process against the president of the republic.

Additionally, the Central Bank reported that exports during the first four months of the year reached USD9.99 million. The growth of non-oil exports stands out, reaching USD7.371 million, which represents an annual increase of 4%. Among non-oil exports, bananas have had an annual growth rate of 14%, reaching USD1.388 million. Imports reached USD9.325 million, representing a decrease of 3.2% compared to 2022. As a result, the Ecuadorian trade balance closed with a surplus of USD665 million up to April 2023.

According to the Internal Revenue Service, during the first quarter of 2023, total tax collection reached USD4.511 million, which represents 1% growth compared to the same period in 2022.

According to the National Institute of Statistics (“INEC”), inflation decreased in comparison with the previous year. In May 2023, inflation stood at 0.09%, marked by increases in foods such as rice and cheese, and beverages such as soda and bottled water. In May 2022, by comparison, the monthly inflation rate was 0.56%.

Trade and foreign investment 

Trade with the US is key to Ecuador as it is the principal destination for non-oil related exports, and favourable conditions are key to local industries. In addition, Ecuador and South Korea have concluded technical negotiations, although there are still some pending issues to be resolved. It is expected that 95% of non-oil exports will have preferential access to South Korea, and sales to South Korea are expected to grow by 27% from the time the agreement comes into force.

Credit Suisse International Bank acquired USD800 million of Ecuadorian debt bonds with discount. The nominal value (without discount) is equivalent to USD1.6 billion. The objective was for the government to repurchase the debt, which it did in May 2023, through so-called blue bonds in exchange for promoting the conservation of the Galapagos Islands. The banking industry has seen positive results in response to important changes, as legal reforms have relaxed specific limitations for investment. The Monetary Board issued important regulations concerning interest rates, specifically as regards maximum ceilings for corporate and business segment rates.

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 from such procedures and international interest remains high. In dispute resolution matters, Ecuador is a signatory of the New York Convention, it has a long-standing arbitration law, and it constitutionally approves of ADR methods in general. International companies have legal assurances that choice of law and jurisdiction clauses are respected in the local courts, including the possibility to sign investment protection agreements.

The changes introduced by the General Regulations for the Mediation and Arbitration Law have proved to be meaningful in public-private relationships as public procurement disputes have been set to go to arbitration as a general rule. Among the most significant changes, the annulment action for arbitral awards has appropriately been narrowed and it is also stated that the execution of a mediation agreement in accordance with the law will not generate civil or administrative liability on the part of the officials of the public entity, except in the case of fraudulent misconduct.

Tax reform 

The first executive decree enacted by President Lasso after dissolving the Assembly was a tax reform. The bill of law includes the following:

1. an increase in annual deductible expenses that can be claimed against income tax, including expenses related to chronic or catastrophic diseases;

2. adjustments to the applicable rate for income tax declaration;

3. a Simplified Tax Regime for Popular Business and Entrepreneurs;

4. applicable monthly tax (15%) on the revenues received by operators of online sports betting or any type of virtual gambling platforms;

5. VAT for public shows or entertainment; and

6. confidentiality of information pertaining to taxpayers.

The Next Presidential Elections 

The country will elect another president at the end of 2023 from a choice of eight candidates who have registered for this election. The candidates’ agendas include security as the key to regaining stability, economic development, and increasing productivity in local economies. Some candidates are including foreign investment as a priority objective in their agenda. A new referendum will also be held about the exploitation of the Yasuni ITT block and the ban on mining activities in the Andean Choco area, the final decision on which will have an impact on the government’s annual budget.