THE BASICS

Ecuador 2014 | FINANCE | INTERVIEW

TBY talks to HE Fausto Herrera, Minister of Finance, on promoting growth and improving Ecuador's economy.

HE Fausto Herrera
BIOGRAPHY
Fausto Herrera graduated from Pontificia Universidad Católica del Ecuador with a degree in economics. He also has an MBA and a Master’s degree in Economics, Finance, and Sustainable Development. During his 10-year career in the public sector, Herrera has served as Vice-Minister of Finance, Subsecretary of Fiscal Relations, Subsecretary for Macro-Fiscal Consistency, Subsecretary for Macroeconomic Policy, and Coordinator of Macroeconomic Planning and Studies. Additionally, he has been an advisor to the National Secretary of Planning and Development (SENPLADES), an advisor to the Minister of Finance, and a consultant to the Inter-American Development Bank (IDB).

Recently, President Correa said that his top goal for Ecuador is to promote social and economic development. What role does the Ministry of Finance play in that?

First of all, we are a growing economy. Over the past five years, we have grown by an average of 4.2%. In our national development plan, we have two clear objectives. The first is to change the energy matrix, and the second is to develop the productive matrix. My role as the Minister of Finance is to secure the necessary financing to achieve these goals. For example, the plan to change our energy matrix will cost approximately $8 billion. The result of this change will mean that, from 2016, Ecuador will save $1.2 billion annually. This is 1.2% of our GDP. Obviously, to do these major infrastructure projects requires a lot of funding, and our goal is to find the best sources of financing to fund public investment.

You recently signed an agreement with the Inter-American Development Bank (IDB). What is the significance of that agreement?

My responsibility as Minister of Finance is to find the best sources of financing with the best terms from sources all around the world. A few years ago, we negotiated a special agreement with China. However, it's not good for an economy to be reliant on only one creditor. Therefore, we are also looking to Russia, Brazil, and multilateral lenders, such as the Corporación Andina de Fomento (CAF) and the European Investment Bank (EIB). We recently opened a new line of credit with the Abu Dhabi Development Fund. We believe the Ecuadorean development policy should be by Ecuadoreans, for Ecuadoreans. For this reason, we don't accept any conditionality on loans or financing.

Ecuador is looking to re-enter the international bond market, and has spoken with representatives from Citibank and Credit Suisse about floating around $700 million in bonds. What steps are being taken in that regard?

In April 2014, I met with institutional investors in Europe and the US to discuss Ecuador's return to the capital markets. International investors have seen the economic growth that Ecuador has experienced in recent years, as well as the current economic health of the country. But, of course, the question is: what is different now? The difference is that we are now a country that knows where we are going, and what we want for the future. We are a country that will not be an exporter of commodities, but a producer of high value-added goods. With respect to the default in 2008, the important thing to emphasize is that these bonds were not created by the Ecuadorean state. They were bonds that we had taken over as a result of the nationalization of private accounts. Private debts were taken over by the state and then restructured. Now, the new Ecuadorean constitution prohibits the nationalization of private debt, which removes the danger of this. The important point is that Ecuador is experiencing strong economic success and, in order to achieve the economic transformation we want, we need stronger financial muscle.

Ecuador has seen strong growth fuelled by a high level of public investment. What is the plan to ensure this translates into longer-term sustainable development?

This depends on evolution over time. If you had asked me in 2007 if Ecuador was an attractive destination for international investment, I would have told you yes, for oil and gas and for mining. Now, after the changes we have experienced over the past seven years in terms of infrastructure, energy, human capital, and the judicial system, we are facilitating new forms of investment. Ecuador is now an attractive destination for investment in non-traditional sectors, not just natural resources, and we are seeing investment from Mexico, the US, Colombia, and Peru in non-traditional sectors like food and industry. Furthermore, we have seen growth in private investment. We hope that, by the end of 2014, we will have investment in exploring our mineral resources. We have $220 billion in proven mineral resources, and private investment will play its role. FDI is not an end in itself, but it is a means to achieving development by allowing companies to create jobs and bring in their knowledge. Our development plan is something comparable to what the Asian tigers did. However, we don't have as much time as them. What they achieved in 30 years, we need to do in 10. To achieve this, we need stronger financial muscle. That is why Ecuador is working to control its current account and public spending. We have the highest level of public investment in Latin America to develop the infrastructure necessary to attract foreign investment.

You compare Ecuador's growth model with that of the Asian tigers. One of the important elements of that growth model was technology transfer. What role does that play in Ecuador's model?

To attract technological investments, we have been working to transform our education system in Ecuador. The city of Yachay is an ambitious plan in this regard, as it combines a technology-based university and a destination for international technological investment. We have created many advantages for technology investment, but the most important is investment in human capital. For this reason, we currently have 8,000 Ecuadorean students studying abroad on government scholarships to ensure that we have prepared the right human capital. Additionally, we have both tax incentives and a good legal framework for technology investments. We don't have the same amount of time as the Asian tigers, and for this reason we need to use what we have. What we have is natural resources, so we are using money from natural resources to fund this technology development.

What has been the most important FDI in Ecuador in recent years?

The most important investments have been in our industrial sector, unlike our neighbors, which have seen major investments in the mineral resource sectors. However, in the future, we are expecting to see more investments in the mining sector. This is a sector where we need foreign investors who can bring in better know-how to help us make the most of our resources.

What has been the most important public sector investment Ecuador has made over the course of your term?

Right now, the most important public investments we are making are in two areas. First, in the petroleum sector, we are spending around 4% of GDP in working to maintain and grow Ecuador's petroleum production. We are upgrading all of our petroleum infrastructure. These can have a return of more than 130%. The other area is the energy sector, which right now consumes 2% of GDP. We are channeling around 8% of GDP into energy investments, such as hydroelectric development, which is expected to produce a return of 1.2% of GDP from 2016 or 2017.

What are your top policy priorities for the coming year?

Our top priority will be to reduce the level of poverty in Ecuador. However, if we don't start to more aggressively transform the productive sector in the country, we cannot effect this economic change. That is why the President is looking to deepen the transformation of the productive matrix by creating more incentives for investment, using public investment to accelerate growth, and creating clear rules for investors. We are also working to ensure that the financial sector can provide the necessary resources to the productive sector to effect this transformation. We recently announced that this year we will be passing a new financial code, which will try to bring the financial sector in line with our development strategy to provide cheaper long-term financing for productive investment.

Why Ecuador?

Ecuador has a different model of development than its neighbors. We believe in our people and what they can do for Ecuador. We are not making superficial changes; we are making deep structural changes to the country that make Ecuador a favorable destination for investment. All foreign and all private investment is welcome in Ecuador as long as it respects three fundamental things: the rights of workers, payment of appropriate taxes, and respect for the environment.