It’s an Opportunity
Contrary to some economists, I uphold that the U.S. financial crisis is an opportunity rather than a threat for the Ecuadorian economy for the following reasons: it is not very likely – not to say impossible – that the North American authorities will increase their interest rates. An increase in rates would go against the number one objective of this country, which is to combat unemployment – today it’s at 9 percent, the highest in recent history – because it would make credit more expensive and, therefore, investments.
On the other hand, increasing interest rates would mean appreciating the dollar in comparison to currencies such as the yen, the yuan and the euro because investors would be incentivized to take sides regarding the best profitability of dollars that would offer deposits on North American currency.
In turn, an appreciation of the dollar would signify accentuating the risk of the recession that is currently blossoming in the United States economy because of the increasing exports in the country. An increase in interest rates would be equivalent to the deterioration of the severe commercial deficit, which the North American balance of payments is already suffering from.
If it is unlikely – or even impossible – that the Obama administration will increase interest rates, so we can conclude two things. The dollar will not appreciate and investors are going to take their U.S. dollars and look for destinations that are more profitable. Latin America would be an important recipient of this fresh money and countries like Brazil, Chile, Colombia and Mexico are going to be the principal beneficiaries, not only due to their good economic perspectives, but also for their solid legal guarantees they can offer foreign investors.
Ecuador would also benefit from this cash flow to the region. It already has higher interest rates than the United States, but it lacks legal security and more investment options. The absolute control that the Executive branch exercises for all other functions of the State can serve – finally – as a commendable objective: to create a range of guarantees and regulations that incite the arrival of those resources, but not as much in the form of debt but rather principally in the form of capital, meaning foreign direct investment (FDI).
The FDI pays taxes, generates jobs and transmits knowledge and good corporate practices. Ecuador has the possibility of investing in North American currency, something Europeans, Chinese and Japanese wish to do so that their respective currencies do not appreciate too much in comparison to the dollar. Investing in the dollar is a better alternative than entering into a war of competitive devaluations between developed countries that have elicited more prejudices and instability than tangible benefits.
On the other hand, increasing interest rates would mean appreciating the dollar in comparison to currencies such as the yen, the yuan and the euro because investors would be incentivized to take sides regarding the best profitability of dollars that would offer deposits on North American currency.
In turn, an appreciation of the dollar would signify accentuating the risk of the recession that is currently blossoming in the United States economy because of the increasing exports in the country. An increase in interest rates would be equivalent to the deterioration of the severe commercial deficit, which the North American balance of payments is already suffering from.
If it is unlikely – or even impossible – that the Obama administration will increase interest rates, so we can conclude two things. The dollar will not appreciate and investors are going to take their U.S. dollars and look for destinations that are more profitable. Latin America would be an important recipient of this fresh money and countries like Brazil, Chile, Colombia and Mexico are going to be the principal beneficiaries, not only due to their good economic perspectives, but also for their solid legal guarantees they can offer foreign investors.
Ecuador would also benefit from this cash flow to the region. It already has higher interest rates than the United States, but it lacks legal security and more investment options. The absolute control that the Executive branch exercises for all other functions of the State can serve – finally – as a commendable objective: to create a range of guarantees and regulations that incite the arrival of those resources, but not as much in the form of debt but rather principally in the form of capital, meaning foreign direct investment (FDI).
The FDI pays taxes, generates jobs and transmits knowledge and good corporate practices. Ecuador has the possibility of investing in North American currency, something Europeans, Chinese and Japanese wish to do so that their respective currencies do not appreciate too much in comparison to the dollar. Investing in the dollar is a better alternative than entering into a war of competitive devaluations between developed countries that have elicited more prejudices and instability than tangible benefits.