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Foreign direct investment in Ecuador fell 26.2 percent during the first half of the year to $295.13 million. Here capital Quito.   (Photo: Proecuador)
Monday, November 24, 2014

Investors Cool on Ecuador

Ecuador attracts little FDI despite its dollar economy and natural resources.



QUITO --- Government officials and media tend to present junkets like the recent presidential trip to Qatar and Chinese loans tied to contracts with Chinese companies for major infrastructure projects like the Coca – Codo Sinclair hydroelectric plant as evidence of surging foreign "interest," often confusing loans with actual investment.

While critics moan about the price of these trips, the multi-billion dollar "portfolios" officials tout overseas sadly remain stalled, for which the Pacific Coast Refinery project isn't the sole evidence. Data reflects a sad reality of investors still looking askance at Ecuador. Other countries in the region – notably Chile and Peru - show this doesn't have to be so. They have similar economic structures, with commodities and agro-industry driving exports and a large retail industry. Yet they attract multiples of the investment Ecuador gets.

In the first half, foreign direct investment (FDI) fell to $295.13 million, a 26.2 percent decline from the $399.75 million reported for the first half of 2013, the BCE reported earlier this month. Too much shouldn't be read into the scale of the decline. At these low levels, contract renegotiations or a relatively modest individual investment can easily lead to a major swing in data.

Review of the BCE's FDI data since 2000, when Ecuador ditched its sucre in favor of the US dollar in a desperate move to stave off hyperinflation, do reveal some long-term trends. Most FDI has unsurprisingly gone into the oil industry as well as telecommunications, which the BCE books under "transport." Retail and manufacturing also attracted foreigners. But compared with the multi-billion investments the neighbors in fact attracted, FDI has disappointed, particularly in light of the protection the dollar offers and the returns the recently passed commodities boom offered.

Ecuadorians have a somewhat schizophrenic attitude toward the economy. The dollar is wildly popular, but measures to support it during tough times (i.e., with a strong dollar and low price of oil) aren't. Foreign telecoms helped millions of Ecuadorians to access telephones for the first time. Buying overseas gadgets by Internet has been popular, but free trade agreements aren't. A vague sensation of fear and a risk to "sovereignty" weighed on the treatment of foreign investors even before president Rafael Correa, derailing the nearly finished free trade agreement with the United States and postponing the one with the European Union for years.

Political instability, with frequent illegal changes in government, reduced investor interest even though the country was as a whole safer than other areas of the region, notably Colombia. Disputes between political leaders and foreign investors increased. In 2006, president Alfredo Palacio nationalized the assets of US oil company Occidental Petroleum. A final resolution remains pending, with Correa staring at the risk of having to pay more than $1 billion for a nationalization he supported.

Correa of course ushered in an increase in political stability after taking office in 2007, and officials tout this to potential investors. This, too, has however been less than it could have been. FDI has seen only a frosty welcome. The 2010 "production code" led to a reduction of corporate taxes to 22 percent, but frequent changes to the tax regime and other legislation keep investor doubts alive. Correa will hardly change this, as keeping real and imagined opponents off balance forms a core part of his political values.

Ecuador thus failed to draw higher investment in oil and mining that the high prices for commodities could have attracted. Belatedly, the government at the end of October tweaked some tax regulations again to try to improve relations with potential mining companies. Deputy strategic sectors minister Angie Toral promised additional incentives, including one that has long been on mining companies' (and others') wish lists: a tax credit for imported heavy equipment, to be booked against the 5 percent currency export tax.

Skeptics of course have reasonable doubts about the social and environmental quality of some of those investments in natural resources. But Ecuadorians in general need to understand that their own attitudes have gone a long way to stymie the benefits that foreign investment could bring.

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission.

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