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Cablegate: Foreign Investment Flows Into Ecuador: 2007 Better Than A

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PP RUEHWEB

DE RUEHQT #0191/01 0591322
ZNR UUUUU ZZH
P 281322Z FEB 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC PRIORITY 8513
INFO RUEHBO/AMEMBASSY BOGOTA 7347
RUEHCV/AMEMBASSY CARACAS 2883
RUEHLP/AMEMBASSY LA PAZ FEB LIMA 2393
RUEHGL/AMCONSUL GUAYAQUIL 3318

UNCLAS QUITO 000191

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV EPET ECON EC
SUBJECT: Foreign Investment Flows into Ecuador: 2007 Better than a
Bad 2006

Ref. A) Quito 192, B) 07 Quito 2277

1. (SBU) Summary. Foreign direct investment in Ecuador totaled
$471 million in the first nine months of 2007. This reflects a
rebound from 2006, when the net investment flows were reduced by the
departure of U.S. and Canadian oil companies. As a result,
investment in petroleum and from the U.S. and Canada showed an
improvement in 2007. Foreign investment declined in most other
sectors in 2007, and investment from a number of other important
sources (Brazil, Mexico, Europe) also declined in 2007. End
summary.

2. (SBU) According to Ecuadorian Central Bank (BCE) data, foreign
direct investment for the first three quarters of 2007 ($470.8
million) was higher than the same period in 2006 ($124.2 million).
The 2007 data appear to reflect a modest recovery from a
particularly poor performance in 2006, when the assets of Occidental
Petroleum were seized and Canadian petroleum company Encana sold its
assets to a Chinese company. These developments show up as net
outflows in 2006 for the petroleum sector and for U.S. and Canadian
investment. In contrast, the petroleum sector showed net inflows in
2007, as did investment from the U.S. and Canada.

3. (SBU) Leaving aside the experience of U.S., Canadian and
petroleum investment, the data for 2007 show a mixed but generally
declining trend for FDI in 2007. Investment from Brazil, Mexico,
and Europe dropped in 2007, although that from China increased from
a very low level in 2006. Investment in the manufacturing, commerce
and transport/communications sectors also dropped in 2007, although
investment in services did increase. Furthermore, FDI in 2007 was
lower than it was from 2002-04, when annual FDI averaged $830
million.

4. (U) The following tables show FDI data for selected countries
and sectors. Data are for the first nine months of each year.
Totals include all FDI and therefore exceed investment for the
countries and sectors shown.

FDI flows by country/region
U.S. dollars, millions
January-September

Year 2006 2007

U.S. -124.1 67.5
Brazil 244.3 141.0
Canada -253.0 23.4
Mexico 42.6 -40.2
Europe 62.0 42.1
China 2.9 50.4
Total 124.2 470.8
.
FDI flows by sectors
U.S. dollars, millions
January-September

Year 2006 2007

Petroleum/mining -236.6 282.2
Manufacturing 46.6 30.8
Commerce 84.4 70.4
Services 53.7 70.0
Transport/communications 94.9 -16.0
Total 124.2 470.8

Source for 2007 Investment
--------------------------

5. (U) We understand that the European and Chinese oil companies
continued to invest, although at reduced rates, for the first three
quarters of 2007. Only after the Correa administration increased
the windfall oil income tax to 99% (reftel b) in October did the
companies freeze their investment plans (that impact would appear in
fourth quarter data which we have not yet seen).

6. (SBU) One major investment project, construction of the new
Quito airport, continues to move forward. According to the airport
consortium, Quiport, the investors disbursed $44 million in 2007,
much of which came from the U.S., with the balance from Canada and
Brazil. We also understand that some U.S. companies, particularly
those outside the more contentious regulated sectors, continued with
their investment plans in 2007. For example, Pfizer opened a new
$50 million facility. Others told us that they were making
investments to address bottlenecks or introduce labor-saving
equipment out of concern that labor costs could rise.

7. (U) Brazilian companies are currently the largest investors in

Ecuador. In addition to Petrobras, the large Brazilian construction
firms Odebrecht and Andrade Gutierrez are active in Ecuador.
Andrade Gutierrez is a partner in Quiport, and the two companies are
some of the most important contractors for major government
infrastructure projects.

8. (SBU) One economic analyst speculated that reduced lending to
Ecuador, following the Correa Administration's statements in early
2007 that it might default on some loans, led to increased FDI. He
argued that companies which previously relied on loans had to
replace some of those loans with capital. While we have not seen
much evidence to reinforce this theory, it seems plausible. One
U.S. oil company still operating in Ecuador lost its bank loan. In
addition, many Ecuadorian companies have kept their capital
offshore, relying instead on tax deductible international loans. It
is possible that some of them also lost their loans and were forced
to bring back some their capital, which may have been reported as
foreign investment.

Comment
-------

9. (SBU) In general, 2007 was considered a difficult year for
investment, as the Correa administration spooked investors with its
often harsh economic rhetoric, even though in practice most of its
policies were more practical than its rhetoric (reftel a).
Therefore it was a surprise to see that foreign direct investment
picked up in 2007. Some of that was due to a rebound from an even
more difficult 2006, but after separating that out it appears that
FDI continued last year, albeit at a reduced rate.

10. (SBU) Much of last year's investment was already in the
pipeline going into 2007. Now most private investment in the
important petroleum sector is frozen and the investment climate will
remain uncertain until the government renegotiates contracts with
the major oil investors. After that, even if the new contractual
structure is agreeable to the oil companies, it will take time for
them to restore their investment programs. We suspect we may see a
similar picture in other sectors as well, since some companies have
told us that they were completing planned investment but were
placing new investment plans on hold until the investment
environment became more predictable.

JEWELL

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