Cablegate: Ecuador Economic News, December 2009 - January 2010


DE RUEHQT #0102/01 0272019
R 272017Z JAN 10



E.O. 12958: N/A
SUBJECT: Ecuador Economic News, December 2009 - January 2010

REF: 09 QUITO 1057; 09 QUITO 930

1. (U) The following is a periodic economic update for Ecuador that
reports notable developments that were not reported by individual
cables during the December 2009-January 2010 timeframe. This
document is sensitive but unclassified. It should not be
disseminated outside of USG channels and should not be posted on
the internet.




-- Suspension of electricity rationing

-- Ecuador retires more than $50 million in global bonds

-- Ecuador's balance of payments recovers

-- Balance of payments safeguards to be gradually reduced

-- GoE closes deposit insurance agency

-- Increase in remittances tax entered into force January 1, 2010


Suspension of electricity rationing


2. (SBU) On January 20, Ecuador's Minister of Electricity and
Renewable Energy, Dr. Miguel Calahorrano Camino, announced the
indefinite suspension of electricity rationing. Starting November
5 the GoE resorted to the rationing - scheduled blackouts -- to
control demand during semi-drought conditions that greatly reduced
hydroelectric output. The GoE has relied on thermoelectric
generators and electricity purchases from Colombia and Peru to fill
the gap during past dry seasons. However, these measures were
insufficient to meet demand this year (see Ref A for additional
detail). Recent rainfall, rationing, and purchase and rental of
additional generating capacity eventually allowed Ecuador's main
reservoir at the Paute dam to fill to a level sufficient to
increase hydropower generation. Although this has relieved the
need for rationing, the GoE cautions that a return to rationing
could be necessary if water levels at the Paute dam again fall too

3. (SBU) The scheduled blackouts caused inconvenience and major
economic losses. While the government reports these losses at $500
million, private sector analysts estimate losses are closer to $1
billion. Small businesses that lacked generators were the hardest
hit as blackouts sometimes lasted as many as 5 to 8 daylight hours
per day, with the longest blackouts occurring in the coastal
regions - and especially highly industrialized Guayaquil. As a
consolation, the GoE has announced a 10% and 20% discount on
electricity to residential and commercial users respectively for a
period of three months beginning February.

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

Ecuador retires more than $50 million in global bonds

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

4. (SBU) On December 30, Ministry of Finance Elsa Viteri announced
that Ecuador retired $55 million of 2012 and 2030 global bonds in
an operation with Italian holders aimed at buying back debt the
government defaulted on in December 2008. According to Minister
Viteri, about $190 million in defaulted debt remains outstanding.
Background: Ecuador refused to pay $3.2 billion in global bonds in
December 2008, claiming there were irregularities in the issuance
of the debt in 2000 after the renegotiation of a previous default.
Italian investors, for internal regulatory reasons specific to
Italy, were unable to participate in the bond repurchase operation
held in June 2009, in which the GOE paid 35 cents on each dollar
worth of debt. The same price was offered to Italian bondholders
who participated in this operation. During the June 2009 buyback,
the GoE successfully repurchased $2.9 billion or 91% of the
country's 2012 and 2030 global bonds via a modified Dutch auction.

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

Ecuador's balance of payments recovers

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

5. (SBU) Ecuador's balance of payments ran a surplus of $24.6
million for the first nine months of 2009. During this time
period, exports fell 37% and imports decreased 21%, compared to the
same period in 2008. While the surplus was significantly lower
than the $3.05 billion surplus for the first nine months of 2008,
it represented a sharp improvement from the first half of 2009.
The turnaround reflected the strong surplus in the third quarter of
2009 of $1.94 billion, a marked recovery from deficits of $1.3
billion and $580 million recorded in the first and second quarters
of 2009, respectively. This recovery is mainly attributed to the
increase in oil export earnings during the second half of 2009, the
partial recovery of remittances from abroad during this same
period, and the financing received by the GoE from China and the
IMF. In addition, the GoE argues that the balance of payments
safeguards imposed in January 2009 were a major factor in the
reduction of imports in 2009. As a result of these combined
factors, both the current account and the capital account reflected
surpluses in the third quarter of 2009.

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

Balance of payments safeguards to be gradually reduced

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

6. (SBU) Resolution 533 of Ecuador's Foreign Trade and Investments
Council (COMEXI), which was published on January 15, 2010,
confirmed the GoE's intention to continue balance of payments
safeguard measures beyond the one-year term allowed under WTO
rules. The safeguards were originally applied on January 22, 2009.
The resolution indicated that the safeguard measures -- ad-valorem
and specific tariff surcharges -- would be reduced by 10% effective
January 23, 2010. According to local press, President Correa
instructed COMEXI to reduce the total tariff surcharges gradually
over six months. COMEXI will meet periodically during this
six-month period to confirm the rate with which the GoE will reduce
the safeguard tariffs.

7. (SBU) President Correa has announced in public remarks that the
GoE may decide to put in place specific trade restrictions to
reduce foreign competition and support local production of
sensitive sectors, such as footwear, leather, and textile and
apparel industries. Correa claims that these industries face
"unfair competition" from countries such as China. However, he and

other GoE officials have provided assurances that the GoE would
comply with its WTO commitments in applying these protections.

8. (SBU) GoE officials argue that the BoP trade restrictions
contributed to the 21%, or $2.75 billion, decline in imports over
the first nine months of 2009 (compared to the same period in
2008), and also promoted an increase in sales of local footwear and
apparel products. Coordinating Minister for Production Nathalie
Cely, who presides over COMEXI, has stated publicly that in
addition to the safeguards, the GoE's implementation of different
plans to increase the country's competitiveness played a role in
reducing imports. Cely justified the gradual reduction of the
safeguards as necessary to avoid an "avalanche of imports."

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

GoE closes deposit insurance agency

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

9. (SBU) On December 31, 2009, the GoE closed Ecuador's Agency for
Deposits Insurance (AGD), adhering to a deadline demanded by
President Correa. The GoE created the AGD in 1998 to insure bank
deposits and liquidate the more than 40 financial institutions that
went bankrupt during debilitating financial crisis of the late
1990s. In late 2009, Correa, frustrated with the AGD's lack of
progress, ordered the Superintendent of Banks to close AGD and
complete the liquidation of the 33 banks remaining from the
original list of over 40.

10. (SBU) The Bank Superintendent accomplished the task of closing
down the AGD and 28 of the 33 failed banks by transferring all
assets to Ecuador's Central Bank. In total, the Central Bank has
received a loan portfolio of about $2 billion and over 6,000
insolvency and bankruptcy cases. It is establishing a special unit
to resolve legal and financial issues related to these assets,
collect amounts owed to the failed banks, liquidate assets seized
from shareholders, and reimburse deposits to clients. The Bank
Superintendent was unable to conclude the liquidation of five of
the 33 financial institutions -- Progreso, Filanbanco, Los Andes,
Benalcazar and Tecfinsa - but has announced its intention to do so
during the first quarter of 2010. In addition, it has announced
plans to disclose a list of directors, managers and bankers that
caused the failure of these 33 financial entities and losses to
third parties, and also warned that it may pursue legal actions
against these individuals.

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

Increase in remittances tax entered into force January 1, 2010

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

11. (U) On January 1, 2010, the GoE's latest tax reform bill,

pending since August 2009 and designed to boost revenue and limit
dollar outflows, entered into force (Ref B). The law passed by the
National Assembly establishes a 12% Value Added Tax (VAT) on
newspaper print, a minimum income tax on companies, and a tax on
shareholders' dividends. The most controversial element,
particularly for multinational companies, is the increase of the
tax on outgoing capital flows from 1% to 2%.

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