Ecuador Update


Here is an economic review from one of the best speakers at our latest course.

Hotel Quito sits atop a high mountain that just above the bustle of Quito. Above the melee it faces down into a jumbled mixture of mankind. Tall skyscrapers sit next to decrepit block shacks with rusting tin roofs. Looking east the hotel backs onto a huge rift that drops immediately down and runs for several miles before opening into the broad valley of Tumbaco, Quito's favorite suburb. From rooms at the back of the hotel, the lobby, huge lush gardens and swimming pool, and stunning views of sunrise…all of these are exquisitely stunning amenities. Each morning Rosetta rays smash through masses of morning clouds and tint the valley views in a soft pink glow. At twilight the panorama, unfolds as millions of lights awaken in the dusk and twinkle through the altitude thinned air like a million Christmas ornaments..

Our recent International Business Made EZ course was held at this hotel and featured a number of speakers including business consultants, rose growers, timber merchants (teak and other hardwoods), Textile experts, artisans and real estate brokers.

One speaker (whom we invite to speak at every course) was Rolf Stern President of BDO Stern. His firm is the leading consulting, advising firm in Ecuador and his economic updates always help clarify the current economic position in Ecuador.

Here are my notes from his session at our last course.

To begin Rolf compared the financial position of Ecuador with Argentina by showing that Ecuador has 12 million people compared to Argentina's 35 million. Ecuador's government debt is 14 billion dollars versus Argentina's 130 billion., plus Ecuador's annual deficit this year is expected to be 2% of the GNP compared to Argentina's 30%.

Then we saw the breakdown the Ecuadorian GNP which is US$17,981 million or US$1,396 per capita. This production breaks into 19.2% commerce and hotels, 18. 3% in manufacturing, 11.1% government services, 17.2% agriculture, hunting and fishing, 9.6% in transport, 11.6% petroleum and mines, 4% construction, 5.1% financial services and 10% other.

Inflation in 1999 was 60%, 2000, 50%, 2001, 22% and is targeted to be 12% in 2002.

The balance of trade was a positive .9 billion in 1999, 1.2 billion in 2001 and is expected to fall to a .4 billion deficit in 2002.

The deficit and balance of trade are both expected to balance when the new oil pipeline is completed next year as oil exports will be able to more than double to 710,000 barrels a day. There are at least 15 to 20 years of reserves in the Oriente. The anticipation of the extra oil is expected to reduce inflation, plus dollarization has brought interest rates down from 75%. Now 9% to 16% corporate rates and 18% to 19% personal rates (credit card rates). This will add 4.5 billion or 30% to the government income and create a surplus.

Rolf pointed out that the country has thrown out two presidents in four years without a drop of blood and that the nation has added considerable political maturity in this process. However there appears to be a scarcity of leadership for the upcoming elections which begin October 2002, with the second election December 2002 and the new administration taking office January 2003.

Local prices and costs are moving up now and will have faster appreciation past 2004 when the new pipeline begins pumping. Partial decentralization will create opportunities at the municipal and provincial levels, but politics will continue to be a distraction from July 2002 when the 90 day campaign period begins. Labor costs have risen from 65 cents an hour to 85 cents an hour.

Good points about investing in Ecuador include…

Investment from abroad is welcome. Equal treatment is given to local and foreign investors. Practically all sectors are open to investors. Profits and capital can be repatriated without restriction. There is a good labor pool and good private sector partners available.

There is OPIC investment protection available and there is a USA treaty of Reciprocal Promotion and Protection of Investments, including debt equity programs when established, plus the USA Andean Preference Law that allows about 5,000 products into the USA duty free is being renegotiated. He noted that this agreement will be merged into the Western Hemisphere Trade Agreement which will allow even more goods to flow freely between Ecuador and North America. Also there is an active presence of the USA Embassy and Department of Commerce, plus good protection of intellectual property, including franchises and trademarks from abroad.

We also learned that the corporate income tax rate (which is only 25% of profits) can be reduced to 15% if annual profits are reinvested.

Rolf predicted that real estate prices were at an all time low in 2000 and that they are generally moving up though there are pockets of bargains still left. He believes that the rises will accelerate in 2003.

After Rolf's speech one of the questions related to whether Ecuador could maintain its dollarization program or if it might suffer a similar fate of Argentina which had to devalue its currency. I pointed out that if Ecuador uses its surplus oil revenues with any intelligence and if the U.S. administration continues its guns and butter spending that the opposite could happen, Ecuador might feel pressure to revalue its currency.

Overall the message in Rolf's session was positive which reinforced Merri's and my positive feelings about the future of this country. If you have questions, Rolf's email address is rstern@bdoconsulting-ec.com and we have invited him to speak at our two upcoming International Business Made EZ courses February 22-24 and March 22-24.

Until next message, good global business and investing!

Gary


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