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Cablegate: Ecuador Econ Weekly: Falling Fdi, More Costly Flour

VZCZCXYZ0008
OO RUEHWEB

DE RUEHQT #2292 2831346
ZNR UUUUU ZZH
O 101346Z OCT 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7872
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6954
RUEHCV/AMEMBASSY CARACAS PRIORITY 2706
RUEHLP/AMEMBASSY LA PAZ OCT 0745
RUEHPE/AMEMBASSY LIMA PRIORITY 1985
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2904
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS QUITO 002292

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR MMALLOY AND MEWENS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EC
SUBJECT: ECUADOR ECON WEEKLY: Falling FDI, More Costly Flour
Subsidy, Crack-down on Fuel Contraband

REF: A: 06 QUITO 1722

B: QUITO 2114
C: QUITO 1842

1. (U) The following is a weekly economic update for Ecuador that
reports notable developments that are not reported by individual
cables.

Decrease in Foreign Direct Investment
-------------------------------------

2. (U) According to recently published data from the Central Bank,
foreign direct investment (FDI) in Ecuador in 2006 was the smallest
in the last five years. FDI was USD 783 million in 2002 but fell
65% to USD 271 million in 2006. According to the Central Bank data,
over the past two years foreign investment in mining and petroleum
has stagnated. Economic analysts blame the departure of US firm
Occidental Petroleum in 2006 and delays in renegotiating oil
contracts following the 2006 revenue sharing requirement (ref a) for
the decline in petroleum investment.
Larger Flour Subsidies through December
---------------------------------------
3. (U) The GOE agreed to continue subsidizing flour until December
2007 to avoid an increase in bread prices. Given higher world
prices for wheat, the production cost for a 50 kilogram sack of
flour has increased to $36 from $27 when the GOE first established
its subsidy program (ref b). The GOE and millers met to renegotiate
flour subsidies October 2. Millers agreed to sell to the GOE at $32
per 50 kilogram sack (below market prices); the GOE will sell sacks
to bakers at $22 (an increase in the per sack subsidy from $3.50 in
September to $10). Gonzalo Correa of the Ecuadorian Millers
Association expects another upward adjustment in prices in December
if international wheat prices continue rising as expected.
Meanwhile, the local media have reported that some small bakers
cannot meet the terms to purchase subsidized flour and are buying
flour at the full market price.
Fuel Smugglers Arrested Under New Law
-------------------------------------

4. (SBU) After seven months of investigation, the National Police
Investigation Unit for Energy Crimes arrested a fuel smuggling gang
October 2 under Ecuador's new Energy Sovereignty Law (ref c). The
20 arrested smugglers will be the first to be tried under this law.
According to Minister of Petroleum and Mines Galo Chiriboga,
employees from state oil company Petroecuador could be implicated.
(Comment: Fuel smuggling is highly profitable since heavily
subsidized fuel in Ecuador is much cheaper than in Peru or Colombia.
Flour producers have suggested flour subsidies may eventually
create the same problem in their sector.)
JEWELL

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