In 2023, Ecuador earned the unflattering title of Latin America’s most violent country, overtaking Honduras and Venezuela along the way, according to figures from think tank InSight Crime. 

As the country continued its rapid descent into total chaos, mostly at the hands of drug gangs, a series of horrifying incidents, labelled as ‘narcoterrorism’ by the nation’s president, took place earlier this year in Ecuador’s largest city and main business hub, Guayaquil.

In January, gunmen forcibly entered the TC Televisión studios in Guayaquil taking journalists hostage during a live newscast. There have been armed attacks in five of the city’s hospitals, and students at the University of Guayaquil have been kidnapped.

President Daniel Noboa described January’s events as an “internal armed conflict”, and the impact of Ecuador’s security crisis in recent years on its low levels of foreign direct investment (FDI) must be examined.

Spiral of violence

Though the iron fist response as part of President Noboa’s Phoenix Plan has shown early signs of being somewhat effective on a security level, undoubtedly some sectors have been hit harder than others by the global perception of danger and insecurity.

According to national tourism federation Fenacaptur, tourism was significantly affected. The sector lost $300m in the first month after the internal conflict was declared; despite of being home to two of the world’s most unique destinations, the Galapagos Islands and the Amazon, the need to travel via Guayaquil or Quito has put people off.

Security costs for businesses in Ecuador are high, due to the commonplace practice of vacunas (extortion), but multinational companies based in dangerous parts of the country have already taken preventative measures, according to Carla Fierro Loor, an associate at law firm ECIJA.

“Durán [a location on the outskirts of Guayaquil] is a city which has been an industrial hub for many years and most industrial operations of the multinationals are based there. But it became very insecure in the past couple of years,” she explains.

“They had two options: some companies decided to invest heavily in security and remain there and some basically just closed their factories and opened in another area.”

Those who decided to stay have had to pay a hefty price for it. 

According to the National Chamber of Aquaculture, the shrimp industry alone, one of the country’s biggest exporters, spent $80m on security last year to protect themselves from piracy when shipping their produce to the ports in Machala and Guayaquil. The banana industry, another major source of Ecuadorian exports, is reportedly facing similarly high security costs. 

More than security risks

Guayaquil-based economist Enrique Macías Chávez acknowledges that although Ecuador’s security problems have some level of impact on FDI, he points out that other security challenges that exist across the region have not been enough to impede its neighbours’ capacity to attract ample foreign investment.

Ecuador attracted $788m in FDI in 2022, according to data from Unctad. That is just a fraction of the FDI that flowed into its neighbours Colombia ($17bn) and Peru ($11.7bn) in the same year. 

Ecuador is a much smaller economy than either one of its neighbours. However, its poor FDI display is reflected in adjusted FDI figures too. At 0.7% of its 2022 GDP, Ecuador’s FDI was among the lowest in the whole of Latin America, according to World Bank figures. 

Mr Macías believes that the country’s challenging business environment is to blame for it. International observers tend to share his view. 

“A number of policy constraints contribute to hampering investment, including the absence of bilateral investment and double taxation treaties with many FDI-source countries,” read a country report by the World Bank’s International Finance Corporation published in 2021. “The country’s relatively few free trade agreements; and its withdrawal from the World Bank’s arbitration court, investor-state dispute settlement convention [ICSID] in 2009. Other measures, including the foreign currency exit tax, inject further uncertainty into Ecuador’s investment climate.” 

However, more than just trying to present to potential investors abroad, Mr Noboa has several key tasks in his in-tray, starting with removing some of the country’s red tape and improving guarantees to foreign investors. 

As regards the latter, on April 21 Ecuadorians will go to the polls to vote in a referendum on numerous matters, including bringing back international arbitration to Ecuador after Rafael Correa, who served as president between 2007 and 2017, withdrew the country from the ICSID.

FDI in Ecuador is even more strategic given the country’s dollarised monetary system, which narrows the space for the government to finance investment with a fiscal deficit and augments the need for private investment, either from domestic or foreign firms. 

Correa’s shadow

Mr Noboa’s main mission in terms of seeking overseas investment is to demonstrate stability by winning the presidential election next year and in so doing gaining a majority bloc in the legislative assembly, which he currently lacks.

Even though his approval rating is at 81.4%, approximately six times that of his predecessors Guillermo Lasso and Lenín Moreno, the very fact that there is an election set to take place in 2025 may well dissuade some investors this year, especially given the unknown quantity of candidates from the Revolución Ciudadana party led by former president in exile, Rafael Correa. 

Mr Correa remains a popular figure in large parts of Ecuadorian society, and although he was able to oversee some foreign investment projects during his presidency he has expressed hesitancy about having an open-door approach to attracting FDI.

“There are a lot of myths about foreign investment, you must be very careful because it is a double-edged sword,” he tells fDi. 

“What kind of foreign investment normally comes to Latin America? It’s not the ones that create assets but rather the ones that acquire assets.”

Some FDI appeal is left

And yet the country’s FDI appeal has seen some foreign investors develop major assets like DP World’s deepwater port in Posorja. The port, which came online in 2020, ranked second in Latin America after Cartagena, Colombia, for efficiency, according to a 2022 ranking by the World Bank.

James McKeigue, director at the British Ecuadorian Chamber of Commerce, suggests that in the long term Ecuador remains an attractive investment location because of its natural resources, most notably its “world-class copper potential”, as well as the trade and investment rewards that can be reaped with the development of the deepwater port in Posorja.

What is more, combatting the security crisis can also bring with it investment opportunities such as bringing in foreign construction firms to build the mega prisons planned in Santa Elena and Pastaza, and potential private security firms.

The road ahead remains uphill for Ecuador and President Noboa. Provided he manages to win elections in 2025, he will need bold reforms combined with an assertive approach to internal security challenges to reignite growth and investment and, ultimately, convince foreign investors Ecuador is open, and safe for business. 

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.