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Ecuador: New leaders face a tough sell
The Miami Herald / August 10, 1998

By Larry Luxner

WASHINGTON -- Today marks the inauguration of Ecuador's new president, Jamil Mahuad -- the Harvard-educated grandson of Lebanese immigrants.

For the last six years, Mahuad, 49, served as mayor of Quito, the capital city. But that was a piece of cake compared to his new job.

At the moment, Ecuador suffers from 40% inflation, 11% unemployment and record low earnings from its chief export, petroleum. It's still cleaning up from $1 billion in crop losses from El Niņo. Foreign debt stands at $15 billion, making Ecuador one of the most heavily indebted countries in Latin America. The United States is the No. 1 source of foreign investment, but in 1997, U.S. investment fell to $75 million from $99 million the year before. Corruption runs rampant, and kidnapping is on the rise.

"Right now, the country lacks total direction, and it's very corrupt at all levels. So any new government is going to make a difference, as long as they have a decent macroeconomic policy," said Joseph Massoud, commercial director at Ultramares, a coffee-exporting company controlled by banana tycoon Alvaro Noboa, who was narrowly defeated by Mahuad in last month's runoff election. "What Mahuad is trying to do is not a secret. Everybody is trying to recuperate taxes, because here, nobody pays taxes."

Alvaro Guerrero Ferber is the new chief of Ecuador's investment promotion agency, known by its Spanish acronym Conam. Late last month, he and the nation's newly appointed finance minister, Fidel Jaramillo, accompanied the president-elect on a visit to Washington, where Mahuad met with President Clinton and top officials from the World Bank, the Inter-American Development Bank and the International Monetary Fund.

"We know we have a very difficult sell, but Ecuador is one of the few countries where there are still opportunities for investing in state-owned telecommunications, energy and oil," Guerrero said in a lengthy interview. "It's a peaceful country, we have a new democratically elected government, and a clear majority in Congress inclined toward market-oriented policies within a social context. No more than 20% of our legislators are leftists, and that's a good sign."

Guerrero, 43, has a master's in business administration from Wharton, and was chief executive of Ecuador's privatized Banco La Previsora before being appointed to his current position. Despite the country's current economic difficulties, he says "we're looking forward to 6% average growth for each of the next four years."

Mahuad's new privatization czar says that over the next few months, observers will see that the incoming government is serious about selling off the inefficient state-owned phone monopoly, Emetel, while boosting foreign investment in the oil and electric sectors.

"Ecuador will have a broad and ambitious plan for modernization of the whole public sector, including the sale of most of the public firms providing public services: telephone, electricity generation and distribution," Guerrero told The Herald. "In the oil sector, there will be private investment in new wells, and a new pipeline from Oriente to the coast. This will be built, owned and operated by a private consortium chosen by international tender, which will be done very soon. Conam will work on 10 or 15 projects at the same time."

Guerrero added: "The president understands the country's need for modernization. One of his main goals is to fight corruption. If you have simple rules and regulations, you can reduce corruption drastically."

Maria Teresa Perez, executive director of the 750-member Ecuadorian-American Chamber of Commerce in Guayaquil, says Mahuad has brought a "climate of confidence" to investors, and that "one of the most important things is to depoliticize the judicial sector, so the rules of the games are very clear for foreign investors. The privatization process must be accompanied by modernization of the state."

Regarding the previous government's two unsuccessful attempts at selling Emetel, Guerrero says "the recent experience of Brazil has been very encouraging, and has shown us that the telecom business is very attractive. We are not going to sell Emetel right away. We want investors to see changes in the country first. We're planning to bid for three to five top investment bankers, reassign the process, and study what went wrong."

On the bright side, Mahuad's rise to power may mean a resolution to Ecuador's long-simmering Amazon border dispute. The fact that Peru's Alberto Fujimori plans to attend today's inauguration in Quito is giving Ecuadoran executives hope that a final agreement with Peru will boost trade between the two countries and free up official funds that had been going for defense.

In addition, the United States is promoting $2-3 billion in highways, oil pipelines, power grids and other integration projects for the border area, with funds to be provided by industrialized nations, non-governmental organizations and the private sector.

"In our view, the market may not be fully incorporating the favorable impact for Ecuador of the peace dividend," says Santander Investment Securities in a recent report, adding that "the relative importance of defense spending in the Ecuadoran economy suggests that the potential impact would be greater than the comparable effect on Peru."

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