Cablegate: Ecuador Economic News: Correa Announces New Economic

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DE RUEHQT #0814 2472027
ZNR UUUUU ZZH
R 042026Z SEP 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC0000
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHCV/AMEMBASSY CARACAS
RUEHGL/AMCONSUL GUAYAQUIL
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RUEHPE/AMEMBASSY LIMA
RUEHQT/AMEMBASSY QUITO

UNCLAS QUITO 000814

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EFIN EC
SUBJECT: ECUADOR ECONOMIC NEWS: CORREA ANNOUNCES NEW ECONOMIC
MEASURES, CENTRAL BANK CUTS 2009 GDP GROWTH ESTIMATES, CAN RULES ON
ECUADORAN SAFEGUARDS ON COLOMBIAN IMPORTS

REF: QUITO 566

1. (U) The following is a periodic economic update for Ecuador that
reports notable developments that are not reported by individual
cables. This document is sensitive but unclassified. It should
not be disseminated outside of USG channels and should not be
posted on the internet.

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Highlights

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-- President Correa Announces New Economic Measures

-- Central Bank cuts 2009 GDP growth estimate

-- GoE Fiscal Deficit in 2009

-- IMF allocation of SDRs to Ecuador to support GoE budget

-- Reorganization of Central Bank Board of Directors

-- CAN rules on GoE safeguards on Colombian imports

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President Correa Announces New Economic Measures

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2. (SBU) On August 26, President Correa announced that the GoE was
submitting that same day a tax reform package to the National
Assembly for its approval. He explained that these tax reforms
were part of broader GoE measures to "face the international
crisis," including reducing the current account deficit, using
international reserves to fund domestic investment, promoting
social justice, combating tax evasion, and boosting productive
sector and internal demand. During his August 26 comments, Correa
voiced his optimism about the economy, predicting GDP growth of 2%
and annual inflation lower than 4%.

3. (SBU) Within the tax reform package, a handful of measures have
received the most attention: 1) the increased tax on money
remittances from 1% to 2%, aimed at stemming capital outflows,
which totaled US$ 4.9 billion in 2008 and have already exceeded US$
5 billion so far in 2009; 2) the planned repatriation of US$ 1.6
billion in international reserves to support domestic investments
aimed at boosting economic activity; 3) the establishment of a
minimum corporate income tax and a 10% tax on shareholder dividends
of companies with high profit levels. (See septels for additional
details on the tax reform plan and the GoE's plan to use
international reserves to fund domestic investment.)

4. (SBU) Private analysts note that the overall goal of this tax
reform package and the broader measures taken by the GoE are to
generate revenues to cover the fiscal deficit, limit the current
account deficit, and redistribute income. Many observers are
critical of the August 26 announced measures, noting that
increasing the tax on capital flows is unlikely to reduce outflows,
which are high due to uncertainty about the economy and GoE
policies. There is also concern that the GoE's decision to close
positions in liquid short-term international assets and invest them
in medium-term illiquid domestic assets will undermine financial
stability and increase Ecuador's vulnerability to external shocks.
Finally, many analysts disagree with Correa's optimistic growth
estimates, with some expecting annual growth below even the Central
Bank's 1% estimate.

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Central Bank cuts 2009 GDP growth estimate

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5. (U) On August 24, Karina Saenz, General Manager of Ecuador's
Central Bank (BCE), revised downward the BCE's estimate for 2009
annual real economic growth to 1%, from its previous estimate of
3.5%. Although Saenz mentioned that "Ecuador has overcome the
worst of the crisis" and would compare well this year against other
countries in the region, the downward revision reflects the BCE's
admission that the Ecuadoran economy has experienced a sharp
downturn since late 2008, after posting 6.5% real growth in 2008.

6. (SBU) According to available Ecuadoran Central Bank data on
quarterly GDP, the economy contracted 1.62% in the first quarter of
2009, compared to the fourth quarter of 2008. Many local
private-sector economists argue that Ecuador's recession began in
the fourth quarter of 2008, with GDP falling an estimated 0.25%
(quarter-over-quarter). However, Central Bank President Carlos
Vallejo has argued publicly that GDP at the end of the first
quarter of this year registered real growth of 1.19% year-over-year
(resulting from the statistical carryover of relatively strong
growth during the second and third quarters of 2008), and he
continues to predict positive real growth for full-year 2009 in the
range of 2%.

7. (SBU) According to Central Bank estimates of economic activity,
the country has experienced a sharp contraction in non-oil sectors
of the economy, compared to previous years. The BCE estimates that
during 2009 "construction and public works" will contract against
2008, from an annual increase of almost 14% to an estimated decline
of 1%. Similarly, the growth rate of "government services"
plummeted from almost 15% in 2008 to an estimated 2.5% in 2009.
These reflect the GoE's inability to copy what it did in 2008 and
drive economic growth through government expenditures. The BCE
also expects limited growth but substantially lower than in 2008 in
private investment, financial services, and manufacturing. The BCE
expects "oil and mining" to continue their recent trend of
declining year/year at a rate of 4-5%.

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GoE Fiscal Deficit in 2009

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8. (SBU) According to Ecuador's Constitution, the GoE must submit
the 2010 budget to the National Assembly within 90 days of
President Correa's August 10 inauguration. The GoE is also
obligated to provide the National Assembly with estimated fiscal
program plans for 2011-2013. Finance Minister Viteri confirmed
during a September 1 press conference that her Ministry is working
on 2009 and 2010 budgets, with the goal of submitting both of them
to the National Assembly in early November. Viteri commented that
the 2009 budget, which was never approved by the legislature, is
based on a US$ 35.5 per barrel price for Ecuadoran oil, whereas the
average to date in 2009 is significantly higher at US$ 45/bbl. She
noted that the 2010 budget will be based on a US$ 61/bbl oil price.

9. (SBU) There are varying estimates for the size of the GoE's
fiscal deficit in 2009, a calculation complicated by the lack of
the 2009 budget, the Finance Ministry's lengthy delay in publishing
budget data, and the increase in recent months in the price of
crude oil. The well-known local think tank "Fiscal Policy
Observatory" estimates the fiscal deficit through July 2009 at US$
420 million. However, this figure does not take into account GoE
arrears to the social security agency (IESS) and delayed transfers
to regional governments and to other public entities. The Fiscal
Policy Observatory, which has a reputation for being pessimistic,
estimates these arrears at about US$ 600 million, and estimates
that the full-year 2009 fiscal deficit could be as high as US$
2.5-3 billion.

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IMF allocation of SDR to Ecuador to support GoE budget

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10. (SBU) As with all other IMF members, on August 27-28 Ecuador
received its share of the IMF's general allocation of US$ 250
billion in Special Drawing Rights (SDRs, or Derechos Especiales de
Giro, DEGs, in Spanish). Ecuador's allocation totaled 224.1
million SDRs, or approximately US$ 350 million. Ecuador will
reportedly receive a second allocation of SDRs in September, valued
at close to US 50 million, stemming from the Fund's planned US$ 33
billion allocation of SDRs on September 9. The disbursement has
generated some controversy in Ecuador, given President Correa's
strong criticisms of the IMF, and there has been some debate over
whether Ecuador would accept the disbursement. Central Bank Karina
Saenz dismissed this controversy during a September 1 meeting with
EconOffs. She stated that not only has Ecuador accepted the SDRs,
the BCE has already requested IMF assistance with trading these
SDRs to another member country for hard currency. Interestingly,
Saenz noted that the resulting dollars will not be counted as
international reserves on the BCE's balance sheet, as are Ecuador's
existing stock of SDRs. Rather, the BCE will transfer the funds
directly to the GoE Treasury accounts at the BCE.

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Reorganization of Central Bank Board of Directors

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11. (U) On July 30, 2009, the National Assembly approved a law that
reorganizes the Board of Directors of the Central Bank of Ecuador
(CBE). Ecuadorian President Correa's administration originally
proposed the law, so it is assumed he will sign it and it will
enter into effect by end-September. The new law replaces the
current board of five officials nominated by the President and
confirmed by the National Assembly, with a fixed slate that does
not require National Assembly approval. The President will still
name his representative as the BCE President, but other board
members will be the Coordinating Minister for Production,
Coordinating Minister for Economic Policy, the Minister of Finance,
a representative of public financial entities, and the Secretary of
National Planning. President Correa has not yet announced whether
he will retain Carlos Vallejo, the current President of the CBE, as
his representative on the Board.

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CAN rules on GoE safeguards on Colombian imports

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12. (SBU) In January 2009, the GoE imposed WTO Balance of Payments
(BOP) safeguard provisions on certain imports, arguing they were
necessary to confront Ecuador's developing BOP crisis. In July the
GOE imposed further one-year emergency exchange safeguard measures,
taking the form of additional tariffs ranging from 5% to 86% and
targeting 1,346 Colombian products (Ref A). The GoE justified this
action as a necessary response to the 18.5% depreciation of the
Colombian peso, which the GoE attributed to Colombian Central Bank
measures. The GoE argued that the weak Colombian peso undermined
the competitiveness of Ecuador's dollarized economy, making
Colombian exports to Ecuador cheaper.

13. (SBU) On August 7, the Andean Community's (CAN) General
Secretary ruled that Ecuador must remove its exchange safeguards on
the 1,346 Colombian products within 15 days. However, the CAN
Secretariat appeared to take pains to avoid benefiting one country
over the other, and also acknowledged that the Colombian currency
devaluation between June 2008 and June 2009 had negatively affected
Ecuadorian products' competitiveness. It, therefore, authorized
Ecuador to apply corrective measures on 666 Colombian products,
subject to several rather vague conditions. These conditions
included the requirements that the corrective measures be
transitory and applied only so long as the currency mismatch
exists, and they cannot exceed the rate of devaluation in
magnitude.

14. (SBU) The GOE has complied with the CAN ruling and has
developed a new list of 666 safeguards on Colombian products.
Coordinating Minister for Production, Nathaly Cely, who traveled to
Lima in early August to negotiate the safeguards issue with the CAN
Secretariat, has stated publicly on several occasions that
Ecuador's safeguard measures accomplished their intended objectives
of reducing Ecuador's trade deficit. According to Central Bank
data, through June 2009, Ecuadoran imports are US$ 1.17 billion
below their level during the equivalent period in 2008.
HODGES

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