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Ecuador: South America’s Brightest Star or the Next Venezuela?

ecuador-star-01

Jesse Bayer

The History

Measured by nearly any economic or social metric, Ecuador enjoyed a sustained boom between 2000-2014.

However this was a relatively new phenomenon for the small South American country. With the approximate landmass of Colorado and a population of just over 16M, Ecuador has experienced tremendous change over the last 30+ years.

As a result of popular revolts against government corruption and mismanagement, Ecuador saw seven different Presidents take office between 1992 and 2007 – there was even a brief time in 1997 where three different individuals claimed to be president of the country simultaneously!

Dollarization following the collapse of the Sucre in 2000 marked the beginning of stability and greater prosperity.

According to The World Bank, GDP rose from $18.3B in 2000 to over $100B in 2014 with the poverty rate dropping from 64.4% to 22.5% over the same period. Population growth, life expectancy and crime rates saw similar positive trends.

For those who understand the mechanics of money creation and that asset prices are inextricably levered to The Money Supply, it will come as no surprise that according to tradingeconomics.com, Ecuador’s M2 Money Supply also increased – from $11.79B in 2007 to approximately $40B in 2015.

According to the same source, consumer credit expanded at a similar rate, rising from $4.9B in 2007 to approximately $16.5B at the end of 2014.

This boom, partly fueled by the increase in money supply and a credit expansion, also coincided with, and was driven by, several larger trends taking place at the national level.

With Rafael Correa’s election in 2007, corruption began to decline and government spending, largely on infrastructure, began to increase.

According to Trading Economics, government spending increased from approximately $368M in 2000 to $2.5B in 2015.

This meant that ports, airports, roads, healthcare, drinking water, sewers, electricity, education, police, and fire were brought up to international standards.

According to a recent survey, conducted by the InterAmerican Federation of Construction Industries as part of the Global Competitiveness Report for 2014-2015, Ecuador ranks fourth in quality of infrastructure in Latin America.

Much of this expenditure was funded by oil revenue. Starting in early 2004, oil prices began to steadily rise, giving OPEC member Ecuador a steady source of capital to finance spending. Oil revenue accounted for as much as 40% of all Government revenue during the strong run for oil prices between Q1 2004 and Q4 2014.

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Jesse Bayer

Where Things Stand Today

A confluence of challenging economic factors hit Ecuador towards the beginning of 2015 that have affected the country greatly and play a big role in the country’s outlook going forward.

Oil prices began to plunge beginning in June/July 2014 and, while they’ve bounced off their lows, have yet to recover to post-2004 levels.

In addition, a strengthening dollar has hurt exports.

At the same time, early 2015 marked the end of a credit and construction cycle – credit began to tighten and construction slowed.

These factors led to budget cuts and a soft job market.

To make matters worse, President Correa in May 2014 announced plans to increase the capital gains and inheritance taxes to levels that caused some amount of capital flight. The proposals have yet to be enacted and it is unclear if they will, but the damage was done.

As a result of these factors, GDP was essentially flat in 2015 and is expected to be negative in 2016.

The government’s response to these headwinds has been to raise taxes and seek external sources of funding in the form of debt.

Rising tax revenue, along with recent loans from the IMF and China have served to cover budget shortfalls for now, but with the state continuing to grow and the environment becoming more difficult for the private sector, barring a significant rise in oil prices these are not sustainable solutions.

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Jesse Bayer

What Does It All Mean?

Ecuador is an amazing country. The climate, variety and natural beauty of the landscape, amazing people, low cost of living, great infrastructure, and the quality of life attainable here are second to none.

As a place to live, it’s hard to beat.

Having relocated from New York City over three years ago, purchasing land, starting a project, and launching a business I couldn’t be happier with my decision.

However, as an entrepreneur/investor evaluating Ecuador, one must consider the pros and cons.

On the positive side there is tremendous opportunity. With only a decade plus of political and economic stability, Ecuador is a relatively new market. Many goods and services that would have significant demand have not yet been brought to market.

Tourism is seeing amazing growth. According to World Bank statistics, Ecuador saw 511,000 tourists visit in 1998. That number rose to 968,000 by 2009 and 1,557,000 in 2014.

In addition foreigners are moving here to live in increasing numbers. Ecuador consistently shows up at the top of publications ranking the best places to retire. While foreigners have settled in places like Cuenca, Banos, Cotacachi, Vilcabamba, Quito and several others on the coast like Manta and Montanita for several years, the rest of the country largely still has yet to be discovered internationally.

From this perspective, Ecuador is in the sweet spot – being a relatively new market, with incredibly attractive attributes such as a varied and amazing climate, great infrastructure, political/social stability, excellent safety, abundant natural resources with excellent tourist/expat growth –offering the right mix for successful investing.

The other side of the coin is the business climate. Current President Rafael Correa considers himself a socialist. He has taken a considerably anti-business, anti-wealth stance as born out by his tax and regulatory policy.

The World Economic Forums Global Competitive Index for 2015-2016 ranks Ecuador 76th out of 140 Nations and 9th in Latin America.

Steep import taxes, a 14% Value Added Tax, inheritance taxes, a 22% corporate tax rate, 35% personal income tax, and a myriad of burdensome rules and regulations have made it more difficult to succeed as an entrepreneur/investor.

Asset prices have of course been affected by the economic situation. Capital has become scarce.

This is an interesting development for real estate as Ecuador, in addition to being such an attractive place to settle, is home to some of the most fertile and resource rich land in the world.

As real estate prices have begun to decline, an already comparatively inexpensive asset has become cheaper.

In addition, investment opportunities for those with capital are more plentiful with potentially better returns as business owners and entrepreneurs have to turn to private financing.

With national elections coming up in 2017, it is unclear what direction Ecuador will take.

With another decade of rule ideologically aligned with that of Rafael Correa, a future like that of Venezuela is not impossible to imagine. However, with a little less spending/borrowing and less controls on business it’s easy to see how Ecuador could capitalize on its amazing potential and insert itself into the conversation as one of the best opportunities in the world.

This article was written by Jesse Bayer. Jesse sold his real estate holdings in New York City and left for Ecuador with his family and business partner in July 2013. Since then Jesse has begun a large-scale development project and co-founded Abundant Living Ecuador, a real estate and relocation services firm based out of Loja.  You can contact Jesse on our contact form.

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