Ecuador's finance minister, Maria Elsa Viteri

Ecuador's private banks are up in arms about the effects of government intervention on their profits. The country's finance minister, however, rejects such accusations, saying that the relationship between bank and customer was in need of a rebalancing. Writer Rodrigo Amaral in Madrid

A stable economy that welcomes foreign investors and is striving to create a business environment that is attractive for the private sector. That is the image that the Ecuadorian government has been trying to convey to international investors around the world. Ecuador's finance minister, Maria Elsa Viteri, is among the most vocal bearers of this message.

It will not be easy, however, to persuade investors to come to Ecuador. The minister concedes that her country suffers a problem of perception. Investors can argue that this bad image is more than justified, considering that Ecuador has defaulted parts of its debt twice in the past ten years. It does not help that the name of the country's president, Rafael Correa, is often mentioned alongside that of his Venezuelan counterpart Hugo Chávez and his Bolivarian Revolution, or that he has cosy relations with Iran and has a tendency to make jibes against the US. Ms Viteri, however, believes that such suspicion is the result of a deep misunderstanding about Ecuador and the Correa government's policies.

Since taking over the government of the embattled South American country in January 2007, Mr Correa has implemented economic measures that are intended to consolidate his 'citizen revolution' and which have caused some consternation in the private sector. Banks, for example, have complained that the government is taking a heavy-handed policy to control their operations, which is denting their profits. Ms Viteri retorts that the government has been rebalancing the relationship between banks and clients, which had previously been skewed to the benefit of the former.

Complaints rejected

"Ecuadorian bankers have often complained, but without reason," she told The Banker during a visit to Madrid, where she met a group of foreign investors. "Profits at Ecuadorian banks are very high, and they have been attracting ever more deposits from savers. However, in Ecuador, banks regrettably maintained some behaviours that were not fair to users of the banking system. We are trying to make sure that clients have an equitable position in terms of the services they receive."

Meddling by the government is not helping their business, say bankers. Between January and November 2009, profits in privately owned banks reached $194m, compared to $326m in the same period of 2008, according to ABPE, Ecuador's banking association. The sector's average return-on-equity ratio fell to 11%, from 20.5%, and the return-on-assets ratio was 1.17%, down from 2.14% in the first 11 months of 2008. To make matters worse, the government's squabbles with international bondholders have cost the banks access to foreign sources of liquidity. Ms Viteri, however, is not convinced by such arguments. "Ecuador's banks have been doing well," she said. "It is important to keep in mind that 2009 was a crisis year and one must check the performance of private banks in other countries too."

Markets still open

Ms Viteri vehemently denies that financial markets have shut down on Ecuador after the debt restructuring of 2009. The process took place after President Correa announced the default on debt held by private investors at the end of 2008. The decision not to pay the debt on the conditions it was contractually obliged to, even though there were no signs that Ecuador could not meet its commitments, was taken following the conclusions of a special commission set up to audit Ecuador's debt. According to critics, the commission was formed by local and foreign debt cancellation activists.

In a forthcoming study by G Mitu Gulachi of the Duke Law School, and Lee C Buchheit, a debt expert at law firm Cleary Gottlieb Steen & Hamilton, it is alleged that the standards used to determine the legality of the debt are "always original and occasionally risible". But the government felt justified enough to launch a restructuring process involving the buy-back of bonds equivalent to one-third of the country's foreign debt. In the end, bondholders had to take a cut of up to 65% on their bonds.

Ms Viteri argues that the process was very much consensual, and that it did not harm Ecuador's standings in financial markets. "Our offer was accepted by holders of 93% of the debt, and this cannot be seen as a unilateral imposition, above all because we had a dialogue with the market," she said. "We didn't put a dagger in anyone's chest."

The minister also claims that Ecuador has not stopped acquiring credit abroad. Foreign money, however, has come mainly from international organisations such as the World Bank and Central American Federation, or the Andes' Development Bank. "We maintain our plans to leverage our development with foreign investments. But there are instruments that we want to make use of, and others that we don't," she stated. "We haven't been rejected by any source of credit that we have sought so far." The government has been unrepentant, claiming that the whole process freed $7.5bn to be invested in much-needed social programmes.

In her meeting with investors in Madrid, Ms Viteri put much emphasis on Ecuador's plans to attract investments to diversify the economy and reduce dependence on oil production. In the Correa government's second year of office, advances seemed to have been made in this area, as the flow of foreign direct investment (FDI) reached almost $1bn, compared with less than $194.4m in 2007 and $270.7m in 2006. Although numbers for 2009 were not ready at the time of the interview, she expressed confidence that the year's FDI figures will be of a similar level to those of 2008.

"I have personally received the visits of many investors interested in our country. And they include banks," said Ms Viteri. "[They were] European banks and other investors that believe in the seriousness of the political process in Ecuador and want to support us."

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The tie that binds: the close relationship between Ecuador president Rafael Correa (left) and his controversial Bolivian counterpart Hugo Chávez is a cause for concern among some Western investors

Vibrant economy

To convince more people that it is worth putting money in Ecuador, Ms Viteri and her colleagues have argued that the country's economy has beaten forecasts by growing 6.5% in 2008 and achieving a small rate of positive growth last year. For 2010, Ms Viteri expects that GDP growth will be more than 6.8%. She defended the government's fiscal position, stressing that government debt stands at about 20% of GDP, and that poverty is falling, although 35% of the country's population is still classified as poor. She also said that the government has no plans to replace the country's monetary regime, although she did not hide the fact that the current dollar-based system is not loved by the administration.

Maybe significantly, Ecuadorian officials seem to be making an effort, at least when they talk to investors, to distance their boss from the 'Bolivarian axis' headed by Venezuela's President Chávez. "Mr Correa is not a transmission belt for Mr Chávez," the Ecuadorian ambassador in Madrid, Galo Chiriboga Zambrano, told the group of foreign investors in the Spanish capital.

"I think this is evident," agreed Ms Viteri. "We develop sovereign policies that concern only Ecuador. But we have an excellent relationship not only with President Chávez, but also with Presidents [Evo] Morales of Bolivia, [Crisitina] Fernández de Kirchner of Argentina, [Michele] Bachelet of Chile, and even Alan García of Peru." Relations between Peru and Ecuador have been historically tense. The general feeling within Ecuador is that the accusations of an unhealthily close relationship with President Chávez is yet another example of ill-educated outsider perceptions of the country widely distorting the reality. Ms Viteri believes that the main culprits for this supposed gap between perception and reality are multilateral organisations that have consistently missed the target on their predictions about the country's economy.

"These organisations suffer from an analytical deficiency to say the least," she said. "It is regrettable that they still have more credibility than developing countries."

The Ecuadorian government felt particularly aggrieved when inter-governmental body the Financial Action Task Force included the country in a shortlist of countries that are not doing their part in the fight against money laundering and terrorism finance. The report, released in February, listed Ecuador alongside Angola, North Korea and Ethiopia as a country that has not yet committed to take action to address deficiencies in its legal framework. But it was anachronistic and biased, according to the minister.

"It's unacceptable that Ecuador has its image affected by a report that is completely out of date, with data from 2007," she protested. "Even though we do not have a specific law on the matter, we've adopted a new constitutional and legal framework that increases transparency and security in the financial system. The question here is to evaluate what is more important, form or substance. It should have been assessed how much Ecuador has done in the past three years and what has been done by those countries that have written laws on the subject."

Ecuador's banking association, for once, is happy to join forces with the government to reject the accusations. Both believe that the report is a form of retaliation for a financial agreement signed by Ecuador with Iran, which allows Iranian banks to fund projects in the South American country. The ABPE, however, was quick to remind Ecuador's central bank that it had warned against the risks of doing such business with Iran. It will take some time, it seems, for the Ecuadorian government and private sector to be of a single mind.

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