Solid ground: multilateral lenders help Ecuador's businesses grow.Ecuador has risen from the ashes of a string of political crises that ran from 1998 through 2000, thanks in large part to the dollar. Adopted five years ago, the greenback greenback, in U.S. history, legal tender notes unsecured by specie (coin). In 1862, under the exigencies of the Civil War, the U.S. government first issued legal tender notes (popularly called greenbacks) that were placed on a par with notes backed by specie. tamed inflation that had pounded the currency it replaced, the sucre. It drove inflation to just under 2% in 2004 from over 90% in 2000. Today, the stigma of economic uncertainty is gone, but the country is far from an attractive destination for big investors, and corporate financing remains hard to get.
One of the chief culprits has been corruption, which analysts say costs the country more than US$2 billion a year. Political shakeups are still fresh in the minds of potential investors. Former President Abdala Bucaram was forced from power in 1997, while Jamil Mahuad Jorge Jamil Mahuad Witt (born July 29, 1949) was President of Ecuador from August 10, 1998 to January 21, 2000. He was forced to resign after a week of demonstrations by indigenous Ecuadorians and a military revolt led by Lucio Gutiérrez. He is of Lebanese and German descent. got the boot in 2000, also before his term was scheduled to end.
That's why politics is still a driving force in corporate finance, says Patricio Baus, general manager for Ecuador at the risk-ratings agency Bank Watch, a unit of the Fitch ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. agency. Ecuador's corporate sector is not very transparent; many companies are con trolled by one shareholder, such as a powerful family, which leaves little room for liquidity on the domestic stock exchange. But that will change, Baus says. It will be impossible for Ecuador to protect business from competition as the country links itself to the global economy.
Competition will be on the way if the country successfully negotiates free trade agreements with the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , the Mercosur trade bloc A trade bloc is a large free trade area formed by one or more tax, tariff and trade agreements. Typically trade pacts that define such a bloc specify formal adjudication bodies, e.g. NAFTA trade panels. and the European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the
European Community . Companies that don't open up to the global economy face the threat of being wiped off the map. "Political immaturity and the corporate structure have hindered the restructuring of the nation's skyline and have kept risk ratings poor, below levels that would bring investors to the country who would otherwise take advantage of healthy macroeconomic mac·ro·ec·o·nom·ics
n. (used with a sing. verb)
The study of the overall aspects and workings of a national economy, such as income, output, and the interrelationship among diverse economic sectors. indicators," Baus says. Inflation rates have dwindled and the economy was set to grow by more than 6% in 2004, among the highest in the region.
For bigger companies, access to capital is not difficult. They have the freedom to take out bank loans or borrow from multilateral lending organizations such as the World Bank or the Inter-American Development Bank Inter-American Development Bank (IDB)
international organization founded in 1959 by 20 governments in North and South America to finance economic and social development in the Western Hemisphere. . They can also tap the Quito Stock Exchange, but the exchange is for a privileged few, a small cluster of companies that controls 85% of the economy.
Domestic banks, meanwhile, are more than willing to lend at rates comparable to the most liquid international markets. Dollarization dol·lar·i·za·tion
The replacement of a country's system of currency with U.S. dollars. has stabilized the banking sector, and the current high price of oil and other commodity prices have also boosted liquidity in Ecuador.
Yet medium-sized companies don't enjoy the same access to credit. When they do get loans, the domestic banks give them less-favorable terms. If bank loans are too expensive, the medium-sized companies can tap alternative sources, such as direct financing direct financing
The raising of funds without using an intermediary. For example, a firm may decide to save an underwriter's fee by offering new securities directly to investors. from suppliers. But small companies often cannot.
Mauricio Salazar, adjunct director for Ecuador at the Andean Development Corporation (CAF CAF - constant applicative form ), a multilateral lending agency, is optimistic op·ti·mist
1. One who usually expects a favorable outcome.
2. A believer in philosophical optimism.
op . The CAF approved $337 million for Ecuadoran projects in 2004, and it has already earmarked another $250 million for this year, says Salazar. Last year, the lender handed out $211 million to improve basic needs, environmental projects, infrastructure, and to create exporters. The lender hopes to gear up the economy so it can modernize, especially in the face of free trade deals.
Last year, the agency created a fund that would give Ecuador's small businesses access to longer-term financing. The Fondo Pals Ecuador makes capital contributions to selected companies. It also helps boost new institutional investors to deepen the financial system. "The year 2005 is going to be key for the consolidation of corporate finance in Ecuador," says Salazar. "Important development projects in the telecommunications, electricity, ports, airports and in other sectors are going to play out in the coming months."
Likewise, issues of asset-backed securities and trusts will pick up, says Fernando Ayala, an analyst at Multivalores, a brokerage unit of the Banco de Guayaquil bank. Financial institutions will go beyond credit cards, automotive loans and mortgages and get more involved in corporate finance.
The stock market, meanwhile, should show some signs of life. International interest rates are expected to climb in 2005, a factor that Ayala says will nudge nudge 1
tr.v. nudged, nudg·ing, nudg·es
1. To push against gently, especially in order to gain attention or give a signal.
2. Ecuadoran companies to go to the domestic exchange, where costs would be lower than those tied to bank loans. New reporting regulations should not scare companies away from listing equity on the local exchange. "The information that issuers must report is not really all that complicated," says Ayala.
Patricio Pena, executive president of the Quito Stock Exchange, says that Ecuador needs to instill in·still
To pour in drop by drop.
instil·lation n. a transparent stock-market culture. "Responsibility lies in the hands of the second- and third-generation of shareholders in the country's family-run companies. They should be aware of the openness that the market is demanding," Pena says.
Access. Meanwhile, the government could step in and help out, says Ricardo Estrada, president of the Corporacion de Promocion de Exportaciones e Inversiones (Corpei), an export agency.
Ecuador's state-run bank, the Corporacion Financiera Nacional, should step in and offer lower rates on loans and on longer terms. "This is the only way to guarantee access to credit to small and medium-sized companies, which face tough banking restrictions," Estrada says. Banks in Ecuador tend to lend no less than $500,000 to businesses, while smaller companies need $250,000 at most, Estrada says.
In 2005, Corpei plans to create an investment fund, financed by the Inter-American Development Bank, to develop corporate-finance alternatives for smaller companies. Others are ready to open their pockets, like commercial bank Banco del Pichincha. Lending will boost the revenue it takes in, which is expected to hit $1.40 billion in 2005, $300 million more than in 2004, says the bank's general manager, Fernando Pozo.
Deposits and investments from its 1.3 million clients will account for the bulk of that, Pozo says. The bank also will manage credit lines from 200 U.S. and European banks. The CAF also will be an important source of financing. Last year, Banco del Pichincha managed $16 million in CAF credit lines, and that figure should jump this year, although Pozo could not say by how much. The bank also hopes to finance international projects this year. "We are already one of the most important banks in the region and will stick to our policy of internationalizing and efficiency," Pozo says.
For some companies in Ecuador, 2005 will be a year for housecleaning house·clean·ing
1. The cleaning and tidying of a house and its contents.
2. Informal Removal of unwanted personnel, methods, or policies in an effort at reform or improvement. and not for borrowing. Confiteca, Ecuador's largest candy producer, will clean up its inventory and readjust re·ad·just
tr.v. re·ad·just·ed, re·ad·just·ing, re·ad·justs
To adjust or arrange again.
re its portfolio while streamlining administrative costs administrative costs,
n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. . "We don't want to take on more debt to continue growing, as our policy now focuses on internal efficiency, which saved $5 million in 2004," says Chiriboga. "That figure will be much higher this year."
Cutbacks or not, things are looking up--and trade will matter for Ecuador like never before. In 2004, Confiteca's sales were $70 million. It expects a 15% increase in revenues this year. The company now exports to 25 countries and hopes to add three or four new markets in 2005.
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