ECUADOR: An Introduction

Political Overview 

Over the course of 2024, Ecuador has seen a change in government with new President Daniel Noboa taking office on November 23, 2023. The presidential change was preceded by the first ever constitutional dissolution of the National Assembly, which also prompted an early exit of Guillermo Lasso as president. Although Daniel Noboa is currently a transitional president (he has announced firm intentions to run for re-election in 2025 to execute a long-term political agenda.

The President submitted a referendum on the first quarter of the year to strengthen legislation for public safety and also measure his political strength. The results reveal support for the government, given that the “yes” vote prevailed in the questions referred to support for the armed forces to decrease organized crime, the creation of specialised in constitutional courts, increased penalties for offences associated with organized crime, and extinction of ownership of illicit origins.

Public policy has shifted to stronger measures to reinstate public safety, and this strategy has come with great support from the public. In general, Noboa has been able to secure significant political support in the new National Assembly from several parties and avoid major political and governance crisis.

The government has welcomed US cooperation in matters of public safety and is developing an ambitious foreign policy agenda to invite investment.

The Main Legislative Developments Under the Current Government 

The government has been successful in moving forward his legislative goals and has achieved approval of five major pieces of legislation with impact on energy, health, labour and tax:

(i) Organic Law for Economic Efficiency and Job Creation

(ii) Organic Law of Mental Health

(iii) Organic Law of Energy Competitiveness

(iv) Organic Law for Wage Equality between Men and Women

(v) Organic Law for Strengthening of Tourist Activities and Employment Promotion

In order to manage an inherited fiscal crisis, a planned increment in taxes was put in place to secure additional revenue. These changes include:

- VAT tax incremented from 12% to 15%

- Special contribution on extraordinary corporate profits for companies

- Tax applied to extraordinary profits from private financial institutions

- Reinstating the cash remittance tax to 5%

While the level of consumption was temporarily reduced in the first portion of the year, political and fiscal stability, along with credit risks, are being managed through the tax reforms and associated new sources of income aimed at continuing that positive tendency. In fact, the general risk assessment has decreased by 15% since the beginning of 2024.

Ecuador’s Economic Outlook 

Credit risks are being managed through the tax reforms and associated new sources of income aim to continue that positive tendency. In fact, general risk assessment has decreased 15% since the beginning of 2024.

The IMF has reported that Ecuadorian growth’s perspective is around 1.8%. Elements considered include business security, global financial conditions, El Niño phenomenon and potential decreases in commodities and main Ecuadorian exports.

Exports in 2023 faced near 9% decrease, mainly driven by oil prices reduction in the first half of the year. However, some major exports are expected to grow in the agricultural sector, such as typical agricultural exports: shrimp, coffee, cacao and bananas.

Mining exports are also growing steadily and keep having support from the government as a strategic sector. In a landmark advancement of investment in this sector, the Cascabel mining project has progressed to the exploitation phase entailing an investment of USD 4.2 billion in the upcoming years.

The government reached a new agreement with the IMF for around USD 4 billion to implement structural reforms. The financial loan will be used to finance the state budget and pay the domestic and foreign public debt. Within the scope of the negotiations framework, Ecuador should gradually eliminate fuel subsidies as the State currently devotes the equivalent of 2.7% of GDP to address this subsidy.

Ecuador’s country risk dropped to 1.119 points following the agreement. The current indicator represents the lowest since January 2023. Country risks is indicative of the financial market’s perception of the country’s repayment capacity.

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 executed their economic cooperation treaty on October, 2023. 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. Another major issue in relation to imports/exports relates to the signing of the commerce treaty with China. In terms of goods, trade between the two countries reached around USD12 billion in 2022. Exports amounted to USD5.823 million, including products such as shrimp, lead and copper concentrate, other mining products, bananas, balsa, wood and wood products, cocoa, among others.

The acquisition of medium and large local companies by foreign investors keeps being a prevalent and important trend. Local parties have gained important knowledge from such procedures and international interest remains high, even within the slowdown of M&A activity internationally. 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.

Upcoming Political Events 

Ecuador is concentrating efforts in solving the internal security crisis and regaining trust from outside markets with fiscal responsibility. The favourable outcomes of the referendum strengthening the government plan to address organized crime. The President aims to maintain his popularity trough 2024 to have a chance of a full 4-year term in 2025. The second half of 2024 is expected to be stable with investment and consumption increasing in relevant sectors, the first quarter of 2025 will see a new alignment of political forces in the general election.