Ecuador, South America’s sole dollarized economy, is back on the radar of foreign investors. After 15 years of state-led planning policies, newly elected President Guillermo Lasso is pushing for a U-turn towards private entrepreneurship and market-first approaches.
Market participants have demonstrated their confidence in Lasso. The country’s sovereign risk premium dropped from a perilous 3,373 basis points in December 2020 to 768 in June 2021, weeks after his inauguration.
For investment bank Barclays, Ecuador’s prospects are promising: credit ratings will keep improving while economic activity and tax revenues bounce back in the pandemic’s aftermath.
- Why Should Investors Consider Ecuador?
- Incentives and Taxes
- Overview of Ecuador’s Stock Market
- Requirements for Nonresidents
- Comparison: Brokerage for Nonresidents
Why Should Investors Consider Ecuador?
Despite the ongoing COVID-19 pandemic, the Ecuadorian Central Bank forecasts a 2.8 percent growth for 2021 GDP. It also expects oil prices to continue rising, benefiting Ecuador’s energy-exporting industry and the overall economy with larger capital inflows.
Ecuador’s legal tender is the US dollar. Unlike for some of Ecuador’s neighbors, currency devaluations or foreign-exchange risks are not an issue. With an average monthly inflation rate of 0.1 percent between January and June 2021, Ecuador has the lowest annual inflation in South America.
In June 2021, the Ecuadorian Central Bank’s business confidence index, a monthly survey of over 1,000 firms across several industries, reached the highest point in years. Recent pro-market reforms, such as the removal and reduction of import tariffs, are driving the optimism.
Incentives and Taxes
Foreign investors can be exempted from the 5 percent tax on repatriation of dividends and returns from securities and fixed-term deposits if they prove that the capital invested came from abroad and that their fiscal residence is not a tax haven. The national tax authority classifies 87 jurisdictions, including Panama, Hong Kong, and Liechtenstein as tax havens. The maturity of fixed-income investments must be over a year to qualify for the exemption.
While brokerage services do not charge investors the value-added tax, foreigners must pay an income tax rate of 25 percent on dividends and capital gains. However, real estate investment trusts (REITs) are exempt from such taxes.
Overview of Ecuador’s Stock Market
The modern Ecuadorian stock market is just 27 years old. In 2019, the trading volume surpassed 10 percent of the country’s GDP, and in 2020, it grew 1 percent despite the pandemic, reaching $11.9 billion. In a similar vein, market capitalization grew by 23 percent in 2020, reaching $10 billion. As of June 2021, the stock market capitalization is $9.5 billion.
Fixed-income assets made up over 99 percent of all trading volume, due to their lower risk and brokerage fees. Over 64 percent of issuers were government entities, followed by private financial institutions with 21.4 percent. Private companies of other industries make up 14.2 percent.
Amid the pandemic, most issuers met their financial obligations and only 15 percent of firms renegotiated payment terms.
According to brokerage firm Casa Real, the Ecuadorian stock market provides between 7 and 9 percent annual returns before fees and taxes.
Requirements for Nonresidents
- Know-your-customer form provided by the brokerage firm;
- Commission sharing agreement;
- A copy of a government-issued ID;
- A banking or commercial reference;
- A copy of a basic utility bill;
- Form of legal origin and destination of resources.
Brokers might require further documents, including:
- Documentation proving Ecuador is not one’s fiscal residence;
- For married investors, a copy of a government-issued ID of their spouse and documentation on the marital property regime;
- A sworn statement of assets for investors worth more than $250,000 for singles and $500,000 for spouses.
Comparison: Brokerage for Nonresidents
There are 31 brokerage firms authorized to operate in Ecuador’s stock market. Individuals must become clients of one of them to be able to trade securities on either the Quito or the Guayaquil stock exchanges.
Most brokerage firms serve institutional rather than individual investors. However, the following serve Ecuadorian residents and nonresidents.
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