The current political situation under Rafael Correa’s socialist government is worrisome for foreign investors, but several factors make for a more attractive market to invest in. The upcoming presidential elections of February 2017, the current state of the economy in Ecuador, and the deteriorating situation of neighbouring socialist countries all help to mitigate the risk of regulatory changes, nationalization, or expropriation in Ecuador.
The Vice President’s candidacy
There are three main candidates that could possibly win the elections in Ecuador this coming 2017; two of them are from right-leaning parties and one of them is Rafael Correa’s hand-picked successor, Lenin Moreno. Moreno, from the party Alianza PAIS, was once the Vice-President of Ecuador under Rafael Correa’s government; his running mate for these 2017 elections is Jorge Glas, who is the current VP.
Moreno and Glas’s candidacy may be worrisome for foreign investment in Ecuador as it may reflect a continuation and intensification of Rafael Correa’s leftist policies. The possibility of Moreno’s victory is strong. Nevertheless, Moreno has already stated several times that despite his history with Correa, he would not follow orders from the latter if he reached the presidency in 2017.
There is no way to prove that Moreno will not act under Correa’s orders if he reaches the presidency, but given the current situation of the economy in Ecuador, there would likely be minimal risk of nationalization, expropriation, or regulatory changes that could significantly affect the private sector in Ecuador.
The current state of the Ecuadoran economy
The adoption of the U.S. dollar in the year 2000 as the official currency of Ecuador resulted in greater security and less volatility compared with countries using local currencies. As mentioned above, dollarization can be a policy that would further foment foreign investment, but the appreciation of the dollar in recent years has increased the financial hardships of Ecuador. Remaining dollarized in a time when the dollar keeps appreciating may pose problems for the Ecuadoran economy, and this will further push the government to rely on commerce and Foreign Direct Investment to sustain its fiscal budget.
A lack of national currency means that Ecuador does not have the power to enact monetary policy that could ease the pains of economic troubles experienced in recent years. One said economic policy would be to devaluate the local currency to help the country in times of economic trouble. But the reality is that Ecuador is subject to the appreciation of the U.S. dollar and has to import its money from the United States Federal Reserve.
This has prompted the Correa government enact taxes and laws in an attempt to prevent capital flight and help keep the dollars they import inside Ecuadoran territory. However, this also means that the government, regardless of its leftist ideologies, has to maintain a good reputation abroad as it relies heavily on commercial policy to help the national economy in times of trouble. Correa himself has explained Ecuador’s reliance on commercial policy; a reliance on commercial policy by nature means greater protection for FDI inside Ecuador.
From the perspective of right-leaning parties, the contest for the 2017 elections is between Cynthia Viteri from the Partido Socialista Cristiano and Guillermo Lasso from CREO. The government plans of Viteri and Lasso promise less regulation of the private market and less intervention of the government: they strive to attract foreign investment, create trade agreements and free trade zones, and reduce taxes.
After almost a decade under Correa’s socialist government, these policies would entail drastic changes for Ecuador. The new economic policies of either right-wing candidate promise to attract local and foreign investment projects that are currently kept on hold due to the policies and taxes of the Correa government towards the private sector.
For investors working in Ecuador, the power Correa holds over various factions of the government seems worrisome when analysing the losses in business suffered in countries with similar political situations such as Venezuela, Bolivia, and Argentina. Nevertheless, being an oil-dependent nation and given the current drop in oil prices, Correa’s policies do not seem extreme in comparison to other socialist nations in South America.
Whilst many of the current laws and taxes that exist in Correa’s Ecuador have discouraged investment from the private sector, the country’s recent economic situation is forcing Correa to align more closely with the private sector and create an investment climate that would attract foreign investors.