VZCZCXYZ0008
PP RUEHWEB

DE RUEHQT #0439/01 1361921
ZNR UUUUU ZZH
P 151921Z MAY 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC PRIORITY 8851
INFO RUEHBO/AMEMBASSY BOGOTA 7553
RUEHCV/AMEMBASSY CARACAS 3030
RUEHLP/AMEMBASSY LA PAZ MAY LIMA 2601
RUEHGL/AMCONSUL GUAYAQUIL 3550
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS QUITO 000439 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR MEWENS 
 
E.O. 12958: N/A 
TAGS: ECON EAID ETRD EINV EC
SUBJECT: ECUADOR ECON WEEKLY: APRIL INFLATION; BANK OF THE SOUTH; 
MINING UPDATE; BANKING LAW CONSEQUENCES 
 
REF: A: QUITO 267;  B: QUITO  365 
 
¶1.  (U) The following is a weekly economic update for Ecuador that 
reports notable developments that are not reported by individual 
cables. 
 
Intervention of Banking Cooperative 
----------------------------------- 
 
¶2. (U) On May 7, the Superintendent of Banks announced that 
Mutualista Benalcazar, a mutual fund/ cooperative bank, had 
insufficient capital, temporarily suspended operations, and 
appointed an administrator.  Benalcazar had 67,000 depositors and 
its deposits totaled $114 million, less than 1% of total deposits in 
the country.  The Superintendency promised the cooperative would 
soon reopen to allow depositors to withdraw money, and sought a 
private bank to take over the cooperative's liabilities.  However, 
no bank expressed interest (in part because it would have to assume 
the liabilities immediately but would only gain control of the 
cooperative's assets in four months).  The Superintendent then 
reported that the government-owned Housing Bank would take over the 
institution.  The Minister for Housing and Urban Development 
promised depositors would be paid up to $12,200. 
 
¶3.  (SBU) Comment:   The suddenness of the Superintendency's 
decisions raises questions about its ability to monitor institutions 
and take appropriate actions to deal with weaker institutions. 
While the Superintendent reported that Benalcazar has a negative 
capital position, a USAID contractor that recently monitored the 
Superintendency's review of the cooperative said that it had cash 
flow problems because it was overextended with some large 
outstanding loans. 
 
¶4.  (SBU) Comment, continued:  Benalcazar's problems also raise 
questions about whether it was affected by the new banking law that 
eliminated commissions and permits the government to lower interest 
rate ceilings.  We do not know if that contributed to its problems, 
although according to one report it had relied on commissions for 
82% of its profits.  Benalcazar's problems alone will not cause 
systemic problems, and initial indicators are that customers are not 
pulling out of similar banking cooperatives.  However, the 
elimination of commissions and lowering of interest rates will 
likely cause problems for smaller financial institutions, which tend 
to have higher costs than larger banks. 
 
Inflation on the Rise 
--------------------- 
 
¶5. (U) According to Ecuador's National Institute of Statistics and 
Census (INEC), monthly inflation in April reached 1.52%, with an 
annualized inflation of 8.8%.  Inflation rose during the first two 
months of 2008 due in large part local natural disasters (ref. a). 
However, rising global inflationary pressure, particularly for food, 
is also driving the inflationary increase.  The products that have 
the highest price increase are food consumption products like 
potatoes, consumable oil, vegetables and poultry. 
 
¶6.  (SBU) The government has denied that inflation will reach double 
digits, as predicted by some local analysts.  One analyst said that 
his rough calculations show 14% annual inflation by the end of the 
year; he added that even if that guesstimate is high, he does not 
see how inflation will remain below double digits.  He said that he 
also sees signs of inflationary pressure from the government's loose 
fiscal policy, saying that some of the inflation leaders are 
domestically produced foods with limited imported inputs. 
 
Ecuador's Contribution to the Bank of the South 
--------------------------------------------- -- 
 
¶7. (U) According to Minister of Finance Fausto Ortiz, Ecuador will 
contribute $400 million over 10 years to capitalize the Bank of the 
South.  Ortiz said that in 2008 Ecuador will contribute $80 million. 
 According to the press, Venezuela, Brazil and Argentina will 
contribute $2 billion each, with Uruguay contributing $400 million 
and Bolivia and Paraguay $100 million each, for a total of $7 
billion.  Ortiz reported that Ecuador, Uruguay, Bolivia and Paraguay 
will be able to borrow up to eight times their contribution, whereas 
the larger countries will only be able to borrow up to four times 
their contribution. 
 
Mining Mandate Creates Job Losses 
--------------------------------- 
 
¶8. (U) Following the adoption of the Mining Mandate by the 
Constituent Assembly (ref. b), mining companies announced that they 
were laying off many of their workers (the mandate cancelled many 
mining concessions and suspended most others until a new mining law 
is in place).  For example, on April 29, Aurelian, a Canadian-owned 
company, announced that it would to reduce its workforce by 80%. 
 
¶9. (U) On May 6, three thousand jobless miners protested in front of 
the Presidential Palace, rejecting the Mining Mandate.  The GOE 
subsequently announced a plan to offer temporary employment to 
mining workers who lost their jobs because of the mandate, working 
on road construction. 
 
JEWELL