Ecuador Point of View


This recent message from an Ecuadorian friend shows what insiders think is happening to the economy there now.

Dear International Friend,

Friend and eClub advisor Andres Cordova recently sent me this following note on what is happening in Ecaudor.

"Let me tell you Gary, the perspectives for Ecuador for the next few yearsare good. There are several elements that lead me to believe this.

The country has successfully weathered one of its worst economic crisis inmany decades, and is coming out strongly. As I always say, the road ahead isgoing to be rough and bumpy, but better times do seem to be on the horizon.

Ecuador's economy has been completely Dollarized for several months now.This, among other things, has brought a great measure of stability to thecountry.

During the first months after the onset of the Dollarization regime,inflation continued to be high, but analyst now regard this as a normalcatch-up situation that had to happen due to the severe distortions we hadin the economy. The rate of inflation has now decreased significantly, andis expected to continue to decrease in the next several months. We are nowwith the lowest inflation rate in two decades.

One of the results of Dollarization and the high inflation rate of the firstseveral months, is that Ecuador may no longer be regarded as one of theleast expensive countries in the World for foreigners. We may still beinexpensive compared to other countries or standards, but not by thesignificant margins of before.

The Dollarization regime certainly has its drawbacks. For example, Ecuadorexports will loose a competitive edge as they become more expensive. Thiswill force our producers to be more productive and competitive, but somewill not be able to play in this new field.

But for the moment, Dollarization appears to be doing much more good thannot. And this may hold true on the long run too.

This new stability we have found in the Dollar, as well as in several otherfactors, has contributed to a great sense of renewed faith and optimism inthe country. I believe this positive attitude, is of great importance forall of us.

National and foreign investment is certainly on the rise inEcuador -investments maintain their value in Dollarized economy -.

The Wall Street Journal Americas, a few days ago published a short articlestating that local and foreign investment in Ecuador during the first sevenmonths of 2001, more than tripled that of the same period in the previousyear. And this is not including the oil sector, which would make the figuressignificantly better.

It is a widespread opinion in qualified circles of economists, politicians,lawyers, etc. in Ecuador that the next few years will be good for Ecuador.It appears that we are already experiencing a high level of growth, that maycurrently be the best of Latin America, calculated at 6% to 7% for 2001, andat 3% to 6% for 2002.

Of course, we are coming up from way down, so this growth, howeversignificant, has to be taken in this perspective.

One of the factors that will most influence Ecuador's sustained recovery inthe next few years is without a doubt the new heavy crude oil pipeline (OCPin Spanish), to begin construction in a short time.

Ecuador has significant oil reserves and the potential to more than doubleits oil exports. If we consider that the OCP will be able to carry asignificantly larger amount of oil than the current pipeline, and thatEcuador's economy depends on more than 50% on oil exports, then it is easyto figure the enormous impact the OCP is going to have on the economy.

The OCP should begin operation by mid year 2003, and it is widely reputedthat this will bring a new bonanza period for the country, similar to thatof the early 70s.

During this time until the new pipeline is ready to operate, there should bea direct investment of over $1.2 billion in the construction of the OCP,with an additional $1.2 billion per year invested in oil exploration andexploitation. High investments in this last concepts, however, shouldcontinue for many years from now, due to what will be Ecuador's addedstructural capacity to export oil .

Some estimates have that during the next 22 years, the OCP could generate$29 Billion in oil exports, and $7.5 Billion in taxes. We are talking aboutvery significant numbers for an economy like Ecuador's.

The current good price of oil is another plus for Ecuador. If it were toplummet, however, we would face important consequences. In any case, it isnot foreseeable that oil prices should drop too much, given the growingtensions in the Middle East and OPEC's current policies. Lets hope theslowdown in the World's economy does not affect the price too much.

There are other important elements to consider, other than the Dollarizationregime and the OCP.

Ecuador is opening up to private investments in electricity,telecommunications and roads. New laws are being issued and new ground isbeing broken in this regard. In the next few years Ecuador should seesignificant investments in these areas.

Of course, we should anticipate delays and complications. These processeshardly go smoothly, anywhere. But I should note that the modernization ofour mindset as well as that of our laws in this regard is a real thing to beconsidered.

In speaking of concessions, one of the most important one to be given in thenext few months will be that of Quito's new international airport.

This will be an investment of over $350 million. An amount in itself quitesignificant to our local and national economy, but most of all important forit will continue to help us along the path of modernization.

The new airport will surely bring added tourism and commerce, as well as amyriad of accessory investments, like hotels, etc. This airport will beconstructed in a zone 40 minutes from Quito which pretty much has nothingright now, so the turnaround is going to be substantial.

The new international airport of Quito will be financed in its entirety by aforeign corporation, that will then operate the airport for several years.

The process for the concession of Quito's new international airport is goingsmoothly. It is expected that the concession be granted before the end ofthe year. The new airport has been on Quito's wish list for much more than adecade right now, so this process of today, fast and effective, speaksvolumes on how many things are changing in Ecuador.

In talking about airports, I should note that the airport of Manta is beinggreatly improved, mostly due to the US Base operating there.

These new improvements should allow this Manta airport an internationalcategory or capacity. As a statement to this I can say that ContinentalAirlines, from the US, appears to have opened offices in Manta and to beplanning on having direct flights there.

Guayaquil's current airport is being greatly improved too.

With regards to the US base in Manta, it is a double edged sword. On the onehand, it does help the local economy and provides assistance in the controlof criminal activities, mostly related to drug trade; but on the other, itis an excuse for some aspects of Colombia Plan to affect us. In any case, abig majority of the population supports the base.

Although we have so far received far fewer Colombian refugees thananticipated and experienced what I should call very minor incursions fromColombian Guerrillas. The Colombia problem should not in any way takenlightly in Ecuador, for a spill over the border could happen and intensifysomewhat in the future.

There are troubling reports from some towns bordering Colombia, someincreased criminal activity is observed there. Ecuador is considering theimplementation of more stringent control measures in the borders, whichuntil recently were pretty much open by any standard.

In other things, Ecuador's Government economic policy suffered a blow whenthe Constitutional Tribunal declared unconstitutional the increase from 12to 14% in the Value Added Tax (IVA in Spanish).

This increase in the IVA, that held for a few months, appeared to be havinga good effect on the economy, with few to none of the bad effects somepredicted, such as an increase in inflation, for among other things ithelped balance the budget as well as to secure IMF support.

Although the taking down of the IVA does not appear to have hurt relationswith the IMF due to Ecuador´s sound economic performance so far (better thanexpected tax collection accounts for this), it is an element of instabilitynonetheless.

As much as many people believe the Constitutional Tribunal should have leftthe IVA as it was, at 14%, for it was working well, I disagree. The raise inthe IVA was obtained by the Government after some struggles with Congressthat ended in an unconstitutional procedure by the executive branch.

I believe that this decision is much better for Ecuador on the long run. Itsbetter to uphold the constitution and the law, than to allow these things topass.

This ruling, I believe, makes the country mature, however bad the actualeffect may be on the short term.

Several rulings of unconstitutionality respective to Government acts, thatthe Government consider setbacks, I believe are allowing the country to beless tolerant with unconstitutionality and illegality. This should beregarded as positive. It works in favor of legal security.

The terrible crisis of 1999 and 2000, produced a swarm of migrants as thecountry had never seen before. Most left for Spain and Italy, countries thatare in need of labor.

This situation, however sad as it leaves broken families among otherconsequences, has reduced the unemployment rate in Ecuador and is the sourceof very significant income for the country, as these migrants have begun tosend substantial amounts of money back to their relatives here.

This, for example, has made Cuenca, a lovely city to the south of Ecuadorthat was home to a great percentage of these migrants, an expensive city inEcuador, were real estate, specially in some regards, has begun to riseconsiderably.

Tourism is another of the pillars in which I believe Ecuador will besupporting its economy in the next several years. Tourism in Ecuador is onthe rise. The importance of this sector appears to have set in theauthorities, tourist operators and normal people. The next few years shouldbe witness to an important effort on Ecuador's part to exploit its greattourist potential.

I believe one of the areas that would most merit investment in the next fewyears is tourism. No doubt about this. Ecuador is a small country that haspretty much everything. Jungles, islands, volcanoes, beaches, colonialcities, handicrafts. Many things at hands reach.

We have a long way to go in this regard, granted. Among other things, welack infrastructure. But if we were there already, than maybe tourism wouldnot provide for the sound investment it may be right now.

As you may know, Ecuador held a border war with Perú in 1995. This was theconsequence of years of mutual mistrust and animosity. This war lead to asignificant peace effort, that concluded in a Peace Treaty, signed in 1999,with the support of several American nations, including the US.

As a consequence of this, relations and trade with Perú are on an all timehigh, and should continue to increase and consolidate. Ecuador's and Peru'seconomies are regarded to be more complementary than competitive, and thiscreates an important opportunity for both countries to become strong tradepartners.

Ecuador has suffered a banking collapse as it never experienced before. Morethan 70% of the banks are now State owned. The last chapter in this story isthe case of Filanbanco, which was State owned too, which shut its doors afew weeks back.

This bank crisis became a huge money drain for the State. Its about over,with a few standing banks bound to slowly capitalize out of this collapse.The worst is over and this should be noted. There are a few banks that Ibelieve may have with some risk to them, so caution should be exercised.

The worst is behind, and better times should come as Country is nurtures itswounds after the bank crisis.

Several modernization, promotion and investment protection laws have beenissued in recent years. There have been several changes in the law to allowfor a safer, sounder and easier investment scenario, for both locals andforeigners. We are still not there yet, we will likely never be. Who is? Butthese are steps forward nonetheless and because of this, significant.

Ecuador has to mature. We have to strengthen our institutions and stopreinventing ourselves every few years. There is a strong current in thisregard.

Many things can be done in Ecuador, the time is good.

Best regards, Gary,

Andrés"

You can obtain more details from Andres at afcordova@accessinter.net

Until next message, good global business and investing!

Gary


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