Ecuador

Originally published: Sep-28-2005

Government

Republic with three branches: (1) executive consisting of the president and his 15-member cabinet; (2) legislative, a unicameral congress with 100 representatives popularly elected to 4-year terms; (3) judicial, comprising the supreme court, provincial courts and ordinary civil and criminal judges. Ecuador consists of 22 republics.

Population

The population in July 2005 was 13.3 million with an estimated annual population growth of 1.24%. Although Ecuadorians were heavily concentrated in the mountainous central highland region a few decades ago, today's population is divided about equally between that area and the coastal lowlands. Migration toward cities -- particularly larger cities -- in all regions has increased the urban population to over 60%. As much as 70% of the population lives below the poverty line.

Ethnic groups include mestizo (mixed Amerindian and white) 65%, Amerindian 25%, Spanish and others 7%, black 3%. 92.5% of the total population is considered literate. Spanish is the official language.

Legal System

The Ecuadorian legal system is based on civil law. Ecuador has not accepted compulsory International Court of Justice jurisdiction. Unfortunately, the judicial system is plagued by processing delays, questionable and unpredictable judgments in civil and commercial cases, inconsistent rulings, limited access to the courts, and impunity, particularly in corruption cases. There are more than 55,000 laws and regulations in force, many of which are conflicting. The courts are also susceptible to outside pressure and bribes. Congress does not have the power to impeach judges, and the judiciary has done a poor job of self-discipline.

Economy

Currency: Effective September 2000, United States dollars became the official currency of Ecuador.

Economic Indicators

(e) estimate (f) forecast

Leading Markets (2003): Latin America (35.26%), U.S. (34.56%), European Union (14.62%), Asia (5.41%)

Leading Exports: petroleum, bananas, shrimp, coffee, cacao, hemp, wood, fish, cut flowers

Leading Suppliers (2003): Latin America (51.57%), U.S. (17.46%), Asia (12.28%), European Union (10.12%)

Leading Imports: industrial materials, nondurable consumer goods, agricultural products

Top Industries: oil and mining, petroleum extraction, food processing, wood products, textiles, chemicals, pharmaceuticals

General Economic Situation

Ecuador has a small economy, with industry largely oriented to serving the domestic market. Gross domestic product (GDP) was just $30 billion in 2004. The Ecuadorian economy is based on petroleum production and exports of bananas (Ecuador is the world’s leading exporter of bananas), shrimp, cut flowers, and other agricultural products with oil accounting for more than 50% of total export earnings in 2004.

Although the country has an abundance of oil reserves, it has been unable to take full advantage of this resource due to mismanagement, lack of investment funds, and corruption. Commercial disputes, as well as judicial and contractual uncertainties have discouraged other countries and private oil companies from investing.

Following the ouster of Lucio Gutierrez as president on April 20th 2005, the former vice-president, Alfredo Palacio, will serve out a term until elections in January 2007. Palacio’s government has pledged to invest windfall oil revenue, caused by the recent explosion in oil prices, in the economy. However, the Economist Intelligence Unit expects that there will be little or no progress on the structural reforms necessary to strengthen growth in the non-oil economy. And, that the government will be under pressure from both the Ecuadorian Congress and the public to concede spending increases. GDP growth is expected to be subdued, reflecting sluggish growth in oil export volumes. Private consumption, supported by remittances from migrants, will underpin GDP growth. Unemployment will remain close to 10%, with under employment approaching 50%.

On the brighter side, inflation, which reached 96.1% in 2000, is expected to remain relatively low -- at a forecasted 2.3% in 2005. The reduction in inflation in the last 5 years is a direct result of the government replacing its own currency (the sucre) with the U.S. dollar. Dollarization has had a good short-term effect in both reducing inflation and increasing GDP growth figures; however, longer-term benefits remain unclear.

Business Climate

Ecuador continues to suffer from the destabilizing effects of drug trafficking in neighboring countries. Corruption in all sectors is rampant. Transparency International’s [http://www.transparency.org/] corruption scale consistently ranks Ecuador near the bottom. It’s Corruption Perceptions Index 2004 ranked Ecuador 112th out of 145 countries and received a score of 2.4 out of 10 (with 10 being highly clean and 0, highly corrupt).

According to a statement of E. Anthony Wayne, Assistant Secretary of State (U.S. Bureau of Economic and Business Affairs):

“Nearly every U.S. company doing business in Ecuador has faced problems with Ecuadorian government entities, from regulatory bodies to the courts and the customs agency… The problems that these investors have reported to us include unclear and contradictory policy signals from competing governmental entities, inconsistent implementation of laws and regulations affecting foreign investors, and opaque judicial processes.”

Areas of concern include:

Judiciary: The judicial system suffers from processing delays and inconsistent rulings. Courts are susceptible to outside pressure and bribes. Dispute settlement procedures are complicated by a lack of transparency in the judicial system as well as the openness of some judges to bribery.

Regulatory system: Ecuador’s complex legal system is not transparent and hinders the enforcement of property and concession rights.

Official Corruption: Corruption is widespread. While the country has regulations to combat official corruption, they are inadequately enforced. Illicit payments for official favors and theft of public funds take place frequently. Local authorities often demand gratuities to issue necessary permits.

To be fair, Mr. Wayne prefaced these remarks with the point that while American businesses in Ecuador face a variety of difficulties, “most are nonetheless able to operate successfully.”

Under current regulations, foreign investors receive the same rights of entry as Ecuadorian private investors. Foreign investment of up to 100% foreign equity is allowed and there is no limit on the amount of royalties that may be remitted in license and franchise transactions. Foreign investors may remit 100% of net profits and capital without restriction. Investors may freely repatriate the proceeds from liquidation of their investments.

Credit and Collections

Collection Experience: Fair
Exchange Delays: 3- months
Preferred Credit Terms: Unconfirmed Letter of Credit
Minimum Credit Terms: Sight Draft

Risk Assessment

Country Risk Rating: C – The high-risk profile of Ecuador’s economic and political environment will further worsen a generally bad payment record.

Sources for further information on doing business in Ecuador

Bomchil Group - Association of Independent Latin American Law Firms: Web site provides advice and answers questions on doing business in 18 Latin American countries.

Doing Business in Ecuador - 2008 Country Commercial Guide, U.S. Department of Commerce

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This information is provided by ABC-Amega Inc. Providing international receivable management and debt collection services for exporters to more than 200 countries including Ecuador. For further information, contact info@abc-amega.com.

This report represents a compilation of information from a wide variety of reputable sources including: the U.S. Department of State, U.S. Commercial Service, CIA World Factbook, Federation of International Trade Associations, and Economist Country Briefings.

Risk Assessment information: Provided with permission by Coface Country Rating.

Information on credit terms and the probability of prompt payment are provided, with permission, from Overseas Press and Consultants (OP&C) as published in IOMA's Report on "Managing Credit, Receivables & Collections," September, 2005.