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Both foreign investment and remittances are falling in Ecuador, here represented by capital Quito. (Photo: Superbass)
Wednesday, November 14, 2012

The Squeegee Kid of the Andes

In contrast to its neighbors, Ecuador’s FDI declines.





From a simple accounting standpoint, if Ecuador could attract foreign direct investment (FDI) comparable to that of its neighbors, a lot of the angst regarding the sustainability of its use of the dollar would evaporate. But while in the first half, FDI in Chile reached $12.3 billion, $7.8 billion in Colombia, $5.4 billion in both Peru and Argentina, in Ecuador it continued minimal. According to the central bank (BCE), first-half FDI totaled just $274.6 million. In contrast with the regional trend, which saw FDI rising 8 percent on the year, despite the uncertain global economic environment, in Ecuador, it fell 22.1 percent from the already low amount of $352.4 million from January-June of 2010. This happened before negative news hit about compensation awarded to Occidental Petroleum and Chevron in international arbitration. There is political pressure not to pay, which would further undermine investor confidence.

Judicial uncertainty and other issues have plagued the country even though it escaped the violence that racked its immediate neighbors. These have shown more sustained growth at a faster pace, albeit not without numerous problems. And they have done a lot of homework, improving bureaucracy. In Ecuador, the number of civil servants has grown by around a third under Correa, but the supposed “return of the state” after the present administration’s six years in office has yet to prove that this has provided tangible benefits. In this year’s World Bank Doing Business review, Ecuador fell five places to 139 from 134, putting it in the bottom five of the annual ranking, only above Bolivia, Suriname, Haiti, and last-place Venezuela. The government may have been spooked by the worsening macroeconomic climate, launching a series of measures that directly or indirectly have reduced some potential for a credit bubble. The interventionist approach however will keep FDI at a minimum.

Overall, remittances from hundreds of thousands of Ecuadorians who emigrated during the wrenching economic and financial crisis (1998-2000) have been a major contribution to the balance of payments. In the economic cycles since then, the fall in the value of the dollar versus the euro, rising employment overseas, and the surge of the price of oil all combined to boost Ecuador’s economy, cushioning it from the need to carry out politically uncomfortable reforms. More recently however, the situation has turned, similar to the dip in late 2008 and early 2009. While the price of oil remains relatively high and the dollar has made moderate gains against the euro, remittances have continually fallen amid the dire labor markets of the US and Spain, which account for the overwhelming majority of money sent to loved ones back home. Some emigrants have returned, while others have sought jobs elsewhere among stronger economies. In the first half, remittances fell 8 percent to $1.22 billion from $1.32 billion a year earlier. Considering the poor outlook particularly for Spain, these are unlikely to rebound in the near term, weighing on consumer spending in Ecuador.

In foreign commerce, the picture through the end of the third quarter was a bit brighter. For the period, Ecuador registered a trade surplus, though tiny. Exports totaled $18.13 billion, thanks to oil exports worth $10.78 billion, compared with $16.65 billion and $9.74 billion, respectively, in the same period 2011. Imports, meanwhile, totaled $18.05 billion, up from $16.73 billion January-September of last year, but allowing for a $77.14 billion surplus compared with the $75.33 million deficit last year. This continues a narrowing trend after the $1.4 million deficit of the first nine months of 2010. Overall, again simply in accounting terms, the reliance (“elasticity” in economic-speak) of imports on the price of oil makes it appear likely that a sharp fall in the price of oil need not immediately translate into a balance of payments crisis. The macroeconomic impact of a fall in consumption that would also entail would however translate to pain in the labor market.

This commentary originally appeared in Ecuador Weekly Report published by Analytica. Republished with permission.

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