Ecuadorian economics and its impact on prospective new residents! (Part II)

In our last blog, we discussed the turbulent economic history of Ecuador and the fact that, despite a growing and booming economy today, this period still has an impact on everyday living in Ecuador and these residual concerns should be considered by potential newcomers wanting to reside here.

The Alcaldia (City Hall) in Cuenca.  It was formerly the main branch of
Cuenca's oldest and largest bank which failed in the 90's.

Now on to a look at the country's financial institutions.  It, of course, can be helpful as an expatriate to have an account here.  When we arrived the second time to become permanent residents, we were able to open a savings account at a bank utilizing just our passports as identification, but it wasn't easy.   It required references from established Ecuadorian citizens (in our case, our attorneys), a translator and it took almost four hours to accomplish.   Once we obtained our residency cedula, we were able to add a checking account but it took the better part of the afternoon to convince our bank to do that without having us endure a six month waiting period!  To say they can be more bureaucratic than government agencies is not an exaggeration.    On the advice of our attorneys we basically utilize our accounts here just for monthly living expenses and a small cash reserve.  We write a monthly check to ourselves from our account in the US and deposit in our account.  It avoids the hassle of  constant international ATM withdrawals (which sometimes presents some special hazards).  The accounts also help provide for automatic payments (insurance, etc) and deposits (required for IVA refunds if you are tercera edad).    We do, however, maintain the majority of our investment funds and savings in accounts in the US.   Two major reasons:  1. if we would ever decide to return to the US (or to another country) there is a 5% tax levied on funds transferred out of Ecuador.  2.  the potential risk due to the instability of local financial institutions, particularly in the case of large deposits.

During all three of the financial shut downs this past year, there were articles in which depositors were quoted as saying they were told their accounts were insured, but that didn't seem to be the case.  They weren't lied to, but financial institution insurance on deposits here is a far, far different animal here than what you are accustomed to in the US.  It is NOT the equivalent of FDIC and FSLIC.   In the case of the recently shut down Coopera, the insurance took the form of a self insured trust account managed by the Coopera itself.  

Prospective account holder question: "Will my account be insured?"

Coopera truthful answer:  "Yes"

Reality:   In the case of mismanagement,  self insurance is of questionable value and offers extremely limited protection!

Ecuador does now have an institution called COSEDE (Corporation del Seguro de Depositos or Deposits Insurance Corporation).  By law, all financial institutions controlled by the Superintendent of Banking and Insurance without any pre-existing comparable deposit insurance coverage are required to join COSEDE and make annual contributions to it.  It is a federally established private corporation but it is NOT, however, backed with federal funding, only the contributions of the member institutions.  The board sets an account account limit on an annual basis (for 2013, the amount was $30,000.  It is somewhat vague as to whether larger accounts are covered up to a $30,000 limit or at all.  In any case, the insurance kicks in only if there is a total failure and closure of the financial institution. If, however, the accounts in the institutions are sold and transferred to other institutions (which the majority of smaller accounts usually are), the insurance is not applicable.

We know of a good number of ex-patriates who have sizable deposits down here.  Many did so because they were attracted by the very high interest rates paid down here.  Rates above 10% on CD's are very common, particularly in the credit unions.    My question has always been:  If these institutions are paying interest rates up to three and four times what is being paid by over 80% of world's financial institutions, what is the risk factor that causes them to have to do that?  Invariably, my friends respond, there may be more risk, but I 'm OK because I'm insured.  I fear most have failed to fully investigate what safety that insurance really offers.  Many may be finding out with these recent closures.

As of the date of posting this blog, it appears that the Coopera depositors of $10,000 or less will be OK because their accounts are being transferred to other institutions.  Depositors of larger accounts will likely not see all of their funds and those they do will be returned over a extended period of time and without interest.

Ecuador has many, many financial advantages for the ex-patriate seeking a retirement haven.  It also has many potential financial pitfalls.  Do your homework, do your due diligence, be cautious and you can enjoy a great life here but understand that you have some homework cut out for you.

An important note of caution to readers:

 Most of the information cited in this blog was presented as I was able to discern it at the time of this posting.  Being marginally conversant with the language and with the difficulty in reading Ecuadorian legal and technical reports, this may have resulted in inaccuracies in some select specific details. Knowing that blogs such as this tend to have very long term readership, I also caution readers that all things DO change with time in Ecuador and many things may have changed by the time you read this.  What was important to me was to give you, the reader,  a reasonable representative overview of the subject as it exists today. This should will allow you to gain some perspective and then be prepared to go forth and do your own due diligence and research if this perspective causes you to have reason to do so!