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Cablegate: Ecuador Economic News

VZCZCXYZ0011
RR RUEHWEB

DE RUEHQT #1068/01 3021416
ZNR UUUUU ZZH
R 291415Z OCT 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0269
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHCV/AMEMBASSY CARACAS 0089
RUEHGL/AMCONSUL GUAYAQUIL
RUEHLP/AMEMBASSY LA PAZ OCT LIMA 0103
RUEHQT/AMEMBASSY QUITO

UNCLAS QUITO 001068

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV EFIN EC
SUBJECT: ECUADOR ECONOMIC NEWS

REF: QUITO 1026; QUITO 893

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.

----------

Highlights

----------

- GoE Announced Stimulus Package to Combat Crisis and Unemployment

- Four Productive Sectors Will Receive GOE's Support

- Unemployment Rises in the Third Quarter of 2009

- GoE Withdraws Public Sector Deposits from Private Banks

- Decree Published on Compulsory Licensing Patented Medicines

--------------------------------------------- -------------------

GoE Announced Stimulus Package to Combat Crisis and Unemployment

--------------------------------------------- -------------------

1. (U) On October 20, President Correa announced his intention to
spend US$2.276 billion on social and development projects aimed at
stimulating the economy and reducing unemployment. Funding would
come from international reserves previously invested abroad
(US$1.782 billion), and cash balances held by the Central Bank
(CBE) (US$494 million). On October 16, Ecuador's international
reserves stood at US$4.8 billion.

2. (U) As part of the GoE's stimulus package, it plans to inject
US$ 600 million into the construction sector, one of the most
dynamic sectors of the economy. In addition, state-owned banks
Banco del Pacifico and Banco de la Vivienda will each receive US$
200 million for granting mortgage loans at a subsidized interest
rate of 5% for a 12-year term. The GOE will also invest US$200
million to grant US$5,000 bonds to middle income families who
acquire a house with a value at or below US$60,000.

3. (U) The GOE also plans to transfer US$465 million to three
public financial institutions (Banco Ecuatoriano de Desarrollo,
Corporacion Financiera Nacional, and Banco Nacional de Fomento) to
fund public works projects, refinance non-performing loans of
companies in several productive sectors, and promote microfinance
initiatives. Finally, Central Bank cash balances will be used to
finance investment projects including construction of hydroelectric
energy plants (such as Sopladora or Mazar), rural electrification
projects, the construction of Millennium Schools (in support of
reaching UN Millennium Goals), flood prevention projects, and the
development of artisanal fishing ports.

4. (U) President Correa claimed that international reserves used
for domestic investment will be repaid to the CBE, but that funds
used from the CBE's cash balances will not be recovered. Although
several economic analysts consider the injection of more resources
into the economy as positive, they are skeptical that it will
result in an increase in employment because the GOE's overall
economic policies continue to deter private investment and the
public sector is not an efficient alternative.

--------------------------------------------- -----

Four Productive Sectors Will Receive GOE's Support

--------------------------------------------- -----

5. (U) Following Correa's October 20 announcement of a stimulus
package, Coordinating Minister for Production Nathalie Cely
identified four economic sectors that will receive additional
support from the GOE because they have been severely affected by
the economic downturn: flowers, shrimp, fisheries and commerce.
Minister Cely also announced a new program, Believe Ecuador (Cree
Ecuador), which promotes mergers and acquisitions for companies
with management/debt problems. For companies facing liquidity or
financial debt problems, refinancing facilities will be granted by
the National Financial Corporation (CFN) and the National
Development Bank (BNF), utilizing Ecuador's international reserves.

6. (U) Minister Cely also announced measures to promote consumption
within middle income segments of the population, including a credit
for refurbishment and purchase of houseware products and furniture.
For private sector employees the credit will be up to US$20,000
repayable over 36 months. Public employees will be eligible to
receive a credit of up to three times their salary to be repaid
over two years for the same purpose. Separately, a microcredit
will be available to all Ecuadorians purchasing domestic tourism
packages valued at up to US$2,000. All these credits will be
granted at a subsidized interest rate of 5%. The GoE also plans to
reimburse 5% of the Value Added Tax for purchases of food,
clothing, hotels, restaurants, and housewares. Finally, Cely said
the GoE would review import safeguards on consumer products that
have caused the highest price increases or the greatest reduction
in volume purchased.

--------------------------------------------- --

Unemployment Rises in the Third Quarter of 2009

--------------------------------------------- --

7. (U) The Ecuadorian Institute for Statistics and Census (INEC)
reported that the unemployment rate rose to 9.1% in the third
quarter of 2009, up 0.8% from the previous quarter, as Ecuador's
economy shrank for the third straight quarter (Ref A).
Underemployment reached 51.7 per cent in the third quarter 2009,
increasing slightly from the 51.6% recorded the prior quarter.

The unemployment rate is higher in Guayaquil (13%) than in Quito
(6.1%). Guayaquil's local economy has been more heavily affected
by the economic downturn due to its greater reliance on external
sector activities, whereas the GoE has increased public sector
employment, especially in the capital.

--------------------------------------------- ----------

GoE Withdraws Public Sector Deposits from Private Banks

--------------------------------------------- ----------

8. (U) On September 24, the Central Bank of Ecuador (CBE) issued a
regulation that requires that non-financial public entities must
only invest their resources in the CBE or public sector financial
institutions. According to the CBE's President, Carlos Vallejo,
this regulation aims to adjust the management of public sector
resources to Ecuador's current Constitution, which states that
"public resources must be managed by the public financial
institutions, in accordance with the law." The GoE had previously

agreed with private banks not to withdraw public sectors resources
from banks as one of the measures to mitigate the impact of the
economic crisis.

9. (U) This policy implies that public sector investments totaling
about US$600 million will be withdrawn from private banks and
transferred to the accounts that these entities maintain at the
CBE. This policy, which excludes Social Security Institute (IESS)
investments of about US$600 million in the private banking sector,
will not reduce liquidity overall in the banking sector, because
the CBE will re-invest the public sector funds back into the banks
through the National Financial Corporation.

--------------------------------------------- --------------

Decree Published on Compulsory Licensing Patented Medicines

--------------------------------------------- --------------

10. (U) On October 26, the GoE published an anticipated
presidential decree (Ref B) on compulsory licensing of patented
pharmaceutical products that identifies the Intellectual Property
Institute (IEPI) as the authority in charge of the process,
including determinations of the length of the license and
remuneration of the patent holder. Regarding remuneration, the
decree is silent on whether or not the GoE will negotiate with
patent holders. IEPI is supposed to work with the Ministry of
Health in evaluating requests for compulsory licensing, which will
be considered on a case-by-case basis. The decree does not apply
to cosmetic and aesthetic medicines, but only to those medicines
used to treat illnesses that affect the Ecuadorian population and
are considered priorities for the public health. The decree covers
both national production and importation under compulsory
licensing.
HODGES

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