Sunday, July 27, 2014

A Few Thoughts on Ecuador as a Retirement Locale

Ecuador, where I intermittently live, is a wonderful country. Like all places, however, it is not perfect and it is not for everyone.

Ecuador is often touted as one of the best places in the world for Americans (and Canadians and Europeans) to retire. Although some of the touting is mere puffery by a much-quoted magazine/website called International Living (I'll tell you what I think of IL in another post – but the short version is this: don't trust them), there's still a great deal of truth to it. Ecuador is beautiful, with a wide variety of delightful environments – the Andes, beaches, the Amazon, Galapagos – as places to live and/or explore; it also has a relatively low cost of living (though not as low as IL might lead you to believe), and decent infrastructure (quite good, in fact, by third-world standards).

Anyone considering Ecuador as a retirement site, though, should give thought to the country's long-term prospects for stability. Much of Ecuador's current attractiveness is because it is enjoying the fruits of an oil boom. However, Ecuador had two major booms in the twentieth century – cacao in the early part of the century and bananas in mid-century. Both, as booms usually do, brought about periods of stability, but both also ended (again, as booms generally do) and when they ended, they were followed by considerable social/political turmoil and military coups.

Now we see Ecuador, having spent the proceeds of the oil boom, turning to currency manipulation. Having imposed (relative) fiscal restraint on itself by adopting the US dollar as its currency fifteen or so years ago, the country is now going to adopt a parallel digital currency.

Any currency (unless fully backed by something) is of course only as good as the faith it inspires in the international community (currency values fluctuate in large part because the amount of faith fluctuates based on each country's situation). Anything issued by Ecuador is likely to be greeted with some degree of skepticism, because of:
  1. Ecuador's past history of multiple defaults (the most recent default was in 2008);
  2. The history of defaults and/or runaway inflation of other Latin American countries (it may not be fair, but the reality is that we all take into account similar cases when making judgments about individual cases);
  3. The similarity of Ecuador's spending and fiscal policies to those of Venezuela and Argentina, and the current shaky conditions of those countries' economies (see #2 for whether this is fair or realistic);
  4. The unwillingness of the congress to back the new currency with dollars.
Point #4 bears further comment. The congress specifically rejected the idea of using dollars to back the new currency and said it would be backed by the assets of the country's Central Bank.
Oswaldo Larriva, a member of Correa’s political party and president of the congressional commission that studied the proposal, questioned attempts by lobbyists to require backing the new electronic money with hard currency. He said the government had expressed its commitment to using the central bank to guarantee any issuance. 
“To keep repeating the same thing, that dollarization is at risk, isn’t an issue that goes against the president, it’s against the nation,” Larriva said to reporters July 15 in Quito. “Don’t repeat those things.”
(By the way, the second paragraph is not an empty threat – in Ecuador, criticizing the president can lead to jail).

As the Bloomberg article notes, it's unclear what assets the Central Bank might use to back the new currency. Ecuador's oil is pledged for the foreseeable future to pay off debts to China, and most of the country's gold was recently turned over to Goldman Sachs in return for a temporary boost in liquidity.
“It does raise a red flag,” Bianca Taylor, a sovereign analyst who helps oversee $210 billion at Loomis Sayles, said yesterday in a phone interview from Boston. “Whenever a country needs to sell or monetize its gold reserves, it’s definitely a signal that the sovereign is strapped for cash.” 
President Rafael Correa is stepping up his search for financing at home and abroad after borrowing more than $11 billion from China since defaulting on $3.2 billion of foreign debt five years ago. Ecuador’s use of the dollar means it can’t finance deficits by printing money like other countries.
Adopting the 'digital currency' is a twenty-first century way to allow the country to effectively print money to cover its deficits. Bloomberg (the first link) also suggests that it might be easy to coerce some people, meaning those without the ability to say no, to accept the digital currency in lieu of dollars:
While the government says it won’t force anyone to accept electronic money as payment, public employees and contractors who want work may have little choice, Aguilar said.
Government contractors will just factor the discounted value of the new currency into their bids (e.g., if the new currency's street price is 91c on the dollar, they'll just add 10% to their bids). Government employees and pension recipients will just have to take the hit.

I make no claim to expertise in such matters, and even if I am right about the direction I think things are going, it could be a long time before the stuff hits the fan; but I think people should take these developments and their possible ramifications into account if planning on Ecuador as a long-term home.

On the bright side, even if my suspicions are right and Ecuador's economy is heading for the toilet, a prudent expat would be unlikely to be hurt (the people of Ecuador would be another matter, of course), because collapses of the sort I expect to see generally have many warning flags, allowing for a timely exit, if needed. A few of those flags, as noted, are already waving, but there will be more as the end nears. My advice – go to Ecuador if you want (I moved to Quito at the first of this year and plan to return as soon as I deal with some matters in the States), but keep your eyes open for further flags, and rent rather than buy.

ADDENDUM: The point of this post is about the effects I expect from this new currency, and what it likely means in light of the government's current policies. It's worth noting, though that the law also gives the government "the power to decide who gets loans and how lenders invest their reserves." Gee , what could possibly go wrong with that?

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