The long wait for capital market reform in Ecuador could be coming to an end, creating the potential for new investment flows to the country even as it sorts out the remaining holdouts from its last default.
The reform has been on the agenda since 2008, almost as long as President Rafael Correa has been in the presidency. Different bills have been submitted by lawmakers and the executive, but most simply faded away.
That changed on March 12, when lawmakers voted to approve the most recent bill, submitted in mid-2013, and sent it to Correa. The president has to act by early April, signing the bill, vetoing it or possibly sending it back to Congress with suggestions.
“This is could be a first step to attracting foreign investment,” said Ramiro Crespo, executive president of Analytica Securities. “As a dollarized economy, investors would not have to worry about exchange rate fluctuations.”
The law, if approved as passed by Congress, calls for the state to pass a series of regulations within 180 days and change a number of existing laws, including the tax law.
On that point, it would eliminate the current 5% currency export tax for investments that remain in country for at least one year, as well as the value added tax on brokerage services.
The law creates a new regulatory agency and creates the mechanism for financial firms to create mutual funds.
The possibility of capital market reform comes amid other moves by the Correa government that could attract investor interest , many of whom have not focused on the country since it default on $3.2bn of debt in 2008. The default has been mostly settled, but there are a few hardcore bondholders who have refused offers. These bondholders, as well as the government, are waiting to see the outcome of the case against Argentina in the US Supreme Court over that country’s default. A victory for the bondholders could complicate Ecuador’s efforts to attract capital, including its potential return to the market with a new issuance.
Ecuadorian and European Union (EU) officials concluded on March 27 the second round of negotiations for a free trade agreement. The Correa government pulled out of negotiations with the EU during the previous decade. Crespo said the agreement will help on a number of fronts, not only guaranteeing export markets, but “providing a level of transparency in government accounts that does not exists right now”.
Ecuador has also signed up as an observer member of the Pacific Alliance, which includes Chile, Colombia, Mexico and Peru. They inked the trade chapter on February10, agreeing to remove tariffs on more than 90% of goods.
The country began the year with a slight recovery in trade, but still ran a deficit. The trade deficit in January was $189m, down from $244m the same month last year. Exports were up by 5%, while imports increased by 2%. Oil, at $1.1bn, accounted for slightly more than half the country’s exports. Next on the list were bananas, which brought in $242m. The EU agreement is critical for Ecuadorian banana exports.
The trade deficit in 2013 was $1.1bn, more than double the 2012 gap of $440m.
Ecuador grew above the regional average last year, coming in around 4.5%. The government is forecasting more robust growth for 2014, as strong as 7%, but this could be over-optimistic unless big investments materialize in key sectors, such as oil, and possibly mining.