VZCZCXYZ0005
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