Corruption, legal insecurity and legislative blockage prevent Ecuador from overcoming its reputation as a high-risk investment destination, according to the US State Department.
The United States Department of State has issued a statement on the investment climate in Ecuador, in which it concludes that there are three factors that damage the reputation of the country.
Ecuador’s main trading partner acknowledges that the government of Guillermo Lasso has adopted an ambitious agenda to boost investment. The plan is based on approaches with businessmen and the strengthening of public finances.
The goal of the Government is to obtain USD 30,000 million in investment during its four years in power, until 2025.
Despite the efforts of the Lasso government, attracting capital from abroad is not easy, according to a statement from the United States Department of State .
“The Lasso administration faces great challenges in its capital attraction agenda, given Ecuador’s historical reputation as a high-risk country for investment,” the report says.
Instability and corruption
The perception of Ecuador as a high-risk country for investment has its origin in three factors, explains the United States.
One of the main obstacles to attracting capital is legal insecurity.
“Economic, trade, and investment policies are subject to frequent change ,” says the United States.
The US government adds that legal complexity due to inconsistent interpretation of laws and regulations increases the risks and costs of doing business in Ecuador.
An example of the uncertainty created by this uncertain legal environment is evident in the constant increase in country risk, an indicator that measures the international market’s confidence in a country’s ability to pay its foreign debt.
For example, the country risk of Ecuador reached 1,454 points on August 1, 2022. The increase of 118 points in a single day occurred after the disposition of the judicial unit of Luxembourg to freeze the bank accounts of Ecuador because it has not paid USD 391 million to the oil company Perenco .
The debt is the product of a ruling by the arbitration court of the International Center for Settlement of Investment Disputes (ICSID), from 2021.
The ICSID ruled that Ecuador had illegally terminated contracts with the Anglo-French oil company in 2008, during the government of Rafael Correa.
Another barrier to foreign investment is the constant political crisis , which prevents the progress of structural economic reforms in the Legislature.
For example, the power struggle between the Government and the Assembly led to the filing of the Investment Attraction Law project , proposed by the Lasso government.
The conflict between the two powers of the State worsened when the Assembly tried to remove Lasso, in June 2022. The initiative, promoted by the Correista political bloc UNES, did not obtain the necessary votes to remove the President.
In an attempt to build bridges, a mixed commission between the Government and the Assembly will be installed in the second week of August, to work on the legislative agenda. The first point to be addressed by the two branches of government will be the Investment Law.
Corruption also drives away foreign private investment.
Although Ecuador makes efforts to carry out tenders and is open to transparent Public-Private Partnerships (PPPs) , “the companies that participate in the processes lack commitments , accountability and transparency,” maintains the United States Department of State.
The reason is that companies seek to do irregular business in countries with high rates of corruption in the public sector , such as Ecuador.
The country ranks 105th out of 180 nations considered in Transparency International’s Corruption Perception Index.
Around the current Government, the Prosecutor’s Office investigates an alleged negotiation for the purchase and sale of public positions in Customs, the state oil company Petroecuador and the Ministry of Agriculture. The case broke out on July 21, 2022.
The United States is one of the 10 main investors in Ecuador, although the amounts are still marginal.
In the first quarter of 2022, foreign direct investment (FDI) from that country in Ecuador totaled USD 10.5 million , according to the Central Bank.
Compared to the same quarter of 2021, FDI from the United States fell 18% .
In the first three months of 2022, US businessmen invested more in trade, manufacturing and transportation and storage , according to the Central Bank.
For the State Department, there are currently five economic activities that may be interesting for investors, due to the boost that the Government is giving to these sectors and due to the changes in consumption habits of Ecuadorians.
These are the oil, mining, energy, telecommunications and electronic commerce sectors.