The antagonistic relationship between Ecuador’s financial sector and government, fuelled by years of crisis and confusing policies, has been smoothed over since the election of the new president, Guillermo Lasso, in April 2021.
Mr Lasso spent most of his life in banking prior to making the leap to politics, initially giving banks new confidence, but policy changes since he has taken office are behind the buoyant mood.
“I think it is important to recognise the efforts of Mr Lasso’s government. [It] was able to control the pandemic and has started implementing reforms we have needed for a long time. The changes are creating a virtuous cycle for investment,” says Ricardo Cuesta, executive president of Banco de la Producción (Produbanco), one of the nine banks in Grupo Promerica.
Mr Cuesta believes the changes were making the economy more dynamic, which would have strong impact on the country’s financial system, including its 24 banks. “Ecuador has a strong banking system that will only be made stronger as the country’s economy expands,” he says.
The country’s economy expanded by 4% in 2021, more than a point above initial forecasts, and inflation was the lowest in South America at 1.9%. International reserves reached a historic high of $8.6bn last year, equivalent to 123% of the private deposits held by the Central Bank of Ecuador. The fiscal deficit in 2021 was $3.7bn, or 3.5% of gross domestic product — a huge improvement over the $7bn deficit in 2020, according to the government.
“Ecuador is in a good place, fiscally speaking, with a significant reduction of the fiscal deficit, which was one of the key credit challenges that we saw. Tax reform that will further improve the fiscal deficit and, beyond that, higher oil prices this year will also help them,” says Jaime Reusche, senior analyst in Moody’s sovereign risk group.
Banking boom
The country’s banks had a good year in 2021, with a 10% increase in deposits and 14% increase in loans, according to the government. Assets of the 24 banks reached $52.5bn at end-2021. Loans totalled $33.6bn and deposits totalled $41.2bn. Non-performing loans were 2.1%, according to the Association of Private Banks of Ecuador (Asobanca).
Mr Cuesta says the system is structured to attend to all needs and, with the government’s reforms, should see a new push in financial inclusion. Produbanco was the country’s third-largest bank in terms of assets in 2021. The banking system is concentrated at the top — the biggest banks hold close to 90% of loans and deposits. “The financial system is structurally sound, solvent and liquid, with regulations that meet international standards,” he adds.
Mr Lasso’s government was able to control the pandemic and has started implementing reforms we have needed for a long time
Marco Rodríguez, Asobanca’s acting executive president, expects loans to the productive sectors and consumer loans to rise strongly again in 2022. “We are going to see an increase in all segments in 2022. People are returning to their normal activity, consuming products and services at pre-pandemic levels,” he says.
The biggest jump, which has an important impact on consumption and labour, is in micro and small businesses. As in the rest of Latin America, the bulk of Ecuador’s businesses and the principal source of employment is in the microenterprise and small business sector (mypes).
Banks provided $2.1bn of microloans in 2021, up 63% from the previous year. Asobanca expects it to be even higher this year. “This [finance] is crucial because it allows mypes to increase production, grow and reach new customers,” adds Mr Rodríguez.
Mr Cuesta says that Produbanco will maintain its leadership role in the corporate sector, but “we see strong growth in the mypes and will be there to attend to their needs”.
Another change in 2022, which is being closely watched, is the pending sale of Banco del Pacífico. Ecuador has been talking about selling the bank, which is run by the state’s National Financial Corporation, since 2016. Mr Reusche believes that selling Banco del Pacífico is a positive move, even more so if it was the start of state processes to attract more foreign direct investment (FDI). “Selling the bank will help with fiscal accounts, but what you need is broader privatisation that would drive FDI to key sectors, such as the financial sector, energy and telecoms,” he adds.
Big changes
The Lasso administration is moving in the direction Mr Reusche suggests and banks are hopeful for a better 2022, thanks to major changes that have been implemented in the past year, including legislation that was approved in the final days of the previous administration. Since Mr Lasso has been in office, Ecuador has adopted a new monetary and financial code, which includes defence of dollarisation, tax reform and consumer protection law in favour of banking customers, as well as proposed economic stimulus and labour reforms.
Ecuador adopted the US dollar as legal tender in 2002; and previous president Lenín Moreno, who was in power from 2017 to 2021, signed the law protecting dollarisation. In early February 2022, the country’s monetary board approved a regulation that ratified the dollar as the country’s only legal tender.
A new economic development and fiscal sustainability law, which came into effect on January 1, modifies laws ranging from investment in oil fields to tax collection. It eliminates loopholes and temporarily increases taxes on large companies and the wealthiest contributors with the goal of generating close to $2bn annually in new revenue.
Mr Lasso announced in January that the government would progressively unwind a 5% remittance tax on international transfers that exporters have criticised as unfairly raising costs since it was implemented by ex-president Rafael Correa in 2007. The tax will drop 0.25 points each quarter this year to reach 4% in October. The tax brought in $1bn in 2020, according to the government.
Asobanca’s Mr Rodríguez says that the economic development law brought Ecuador closer to complying with best international practices. “The new law changes the definition of financial activity, providing oversight and control agencies with the right kinds of tools,” he explains.
The big change on the horizon is a package of legal reforms that the Lasso administration submitted in February to attract FDI. The goal is to bring in $30bn in private investment in both key and emerging sectors. It would allow for public–private joint ventures, promote the creation of free-trade zones and breathe life into the country’s small stock exchange. Most controversially, it would begin a process of labour reform.
The government wants to boost the hydrocarbon sector, which has long been the motor of economic growth. Oil exports were close to $8bn in 2021 and will likely be much higher this year as international prices soar. The other top exports are fish and shellfish, which brought in $5.7bn, and bananas, which generated $3.3bn.
Mining potential
The Lasso administration, like the two before it, wants to boost mining. Ecuador has copper and gold resources and currently two big mines, one operated by Canada’s Lundin Gold and another by China’s Ching Railway Construction Corporation and Tongling Nonferrous Metals Group. Mining exports were $2.1bn in 2021.
Mr Reusche thinks that Ecuador has the potential to be an important mining country because of its geology and installed infrastructure, but the government has a lot of work to do first. “The potential is there to develop an interesting and competitive mining sector, but there would need to be much more investment and policy continuity, which is something Ecuador has lacked,” he adds.
Another key component of the strategy is trade openness, with a focus in 2022 on China, Mexico and the US. China is Ecuador’s second trading partner after the US and a major source of FDI. Currently, Ecuador imports 21% of its goods and services from the US and exports 30% of its goods to the US. China, on the other hand, accounts for 19% of Ecuador’s imports and receives 13% of its exports, according to the Ecuadorian trade ministry.
A trade deal with the US is being pushed in Ecuador, as well as in the US. In early February, four US senators — two Democrats and two Republicans — submitted the US–Ecuador Partnership Act that could lead to strong trade. Ecuador also would like to work out a deal to extend its $5bn debt with China, most of which comes due by the end of 2025.
In addition, a trade deal with Mexico is the final piece Ecuador needs to join the Pacific Alliance, which includes Chile, Colombia, Mexico and Peru as full members, and Singapore as an associate member. A bilateral agreement with all member states is a prerequisite to join.
“Ecuador needs to open up to the world to compete, win market share and innovate. Trade agreements and alliances are important to energise the flow of goods, and facilitate transactions and co-operation,” says Mr Rodríguez.
