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C O N F I D E N T I A L QUITO 000121 
 
SIPDIS 
 
USTR FOR BENNETT HARMAN 
 
E.O. 12958: DECL:02/17/2019 
TAGS: ETRD EINV EFIN EPET ECON EC
SUBJECT:  A Somber U.S. Business Forum Briefs the Ambassador 
 
Ref.  A) Quito 98, B) Quito 60, C) Quit...



id: 192675
date: 2/18/2009 20:41
refid: 09QUITO121
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classification: CONFIDENTIAL
destination: 08QUITO1178|09QUITO22|09QUITO60|09QUITO98
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C O N F I D E N T I A L QUITO 000121 
 
SIPDIS 
 
USTR FOR BENNETT HARMAN 
 
E.O. 12958: DECL:02/17/2019 
TAGS: ETRD EINV EFIN EPET ECON EC
SUBJECT:  A Somber U.S. Business Forum Briefs the Ambassador 
 
Ref.  A) Quito 98, B) Quito 60, C) Quito 22, D) 08 Quito 1178 
 
Classified by Ambassador Heather Hodges.  Reason: 1.4 b and d. 
 
¶1.  (C) Summary.  On February 13, U.S. companies briefed the 
Ambassador on the business climate in Ecuador.  The tone was somber, 
as the representative outlined challenges and risks, but also 
opportunities for their companies, which are representative of many 
business sectors in Ecuador.  Most were concerned about weakening 
demand in Ecuador and abroad, the risk of dedollarization, declining 
export competitiveness, problems raised by restrictive Ecuadorian 
trade measures, the need to take defensive positions by saving cash 
and reducing workforces and, for the petroleum and banking sectors, 
continued regulatory uncertainty.  Not all was negative, however, as 
the business representatives noted that the government heard their 
concerns and gave them some relief on the trade restrictions, and 
several noted that the trade restrictions will also provide 
opportunities that some industries will be able to exploit.  End 
summary. 
 
¶2.  (U) The Ambassador met with the U.S. Business Forum on February 
¶13.  The U.S. Business Forum operates in parallel with the AmCham and 
is focused on U.S.-owned or operated businesses, and provides the 
participants an opportunity to exchange information on the current 
business climate. 
 
Autos 
----- 
 
¶3.  (C) The General Motors manager (GM) led off by discussing the 
trade restrictions that Government of Ecuador imposed in January 
(reftel b).  He said that GM participated in the discussions the GOE 
had with the private sector, and obtained some flexibility in GM's 
quota by excluding imported kits that are used to assemble vehicles 
for export, taxis or the government.  However, GM declined to sign 
the agreement that most large importers signed.  The GM 
representative noted that the trade restrictions complicate GM's 
production management in the region, since GM coordinates production 
between its facilities in Ecuador, Colombia and Venezuela, and now 
the Colombian and Venezuelan plants face high tariffs in exporting to 
Ecuador. 
 
¶4.  (C) The GM manager said that his factory had to shut down for 
five days because the sudden imposition of new certification 
requirements (reftel d) blocked the importation of a range of parts 
used for auto assembly.  He said that for one product the Ecuadorian 
standard was 20 years old and no laboratory tests to that standard 
anymore.  He said his factory was on the verge of shutting down again 
when the GOE temporarily lifted the certification requirement for six 
months (reftel a). 
 
¶5.  (C) Turning to the current business climate, the GM manager said 
that his sales were up 20% in January 2009 compared to January 2008, 
the only GM unit worldwide to experience a sales increase.  He 
assumed the jump was because customers were anticipating a price 
increase and/or because they were converting financial savings into 
real goods out of a concern about pending financial sector 
difficulties.  He said that most sales were for cash, as financing 
for auto purchases has sharply contracted. 
 
Banking 
------- 
 
¶6.  (C) The Citibank representative stated that deposits in the 
banking sector have declined, reflecting an overall decrease in 
liquidity in Ecuador due to balance of payments and fiscal 
constraints, plus withdrawals by clients who are concerned about 
Ecuador's ability to maintain dollarization.  She said that the 
banking sector is protecting its liquidity by reducing lending, and 
seemed to believe that overall the sector was sound.  She was 
concerned that several smaller banks were in a difficult position 
and, if closed, might promote panic about the state of the overall 
banking sector. 
 
¶7.  (C) Regarding the balance of payments pressure that Ecuador is 
facing, the Citibank manager said that she is concerned that Ecuador 
may go beyond the current 1% tax on transfers abroad and may impose 
capital controls as some point. 
 
Energy Sector 
------------- 
 
¶8.  (C) The head of a local oil services company owned by a U.S. 
citizen said that there was little investment in the petroleum 
sector.  Foreign oil companies had dramatically cut back on 
investment in recent years with the imposition of windfall oil income 
taxes, and more recently state-owned Petroecuador suffered a dramatic 
cut in its investment budget because of falling oil income. 
 
¶9.  (C) The manager of Machala Power/EDC, electricity and natural gas 
companies owned by Noble Energy, said that his company had reached an 
agreement with the GOE whereby the GOE would pay Machala Power $70 
million in arrears, and in turn Machala Power would withdraw its 
international arbitration case (refel c).  However, he has been 
informed that that GOE no longer has sufficient cash and therefore 
will not be making the payment. 
 
¶10.  (C) After the meeting, the Machala Power/EDC representative told 
EconCouns that he is concerned about the GOE's approach to the EDC 
gas company.  In a recent meeting with Carlos Pareja, Under Secretary 
for Petroleum, Pareja told him that President Correa has decided that 
EDC's production contract should be converted to a service contract, 
and EDC would be paid a fee of $2 for every thousand cubic feet (Mcf) 
of gas produced.  If not, Machala Power/EDC should "begin to pack its 
bags."  The representative said that currently EDC charges its sister 
company approximately $3.75/Mcf, which is low in order to generate 
profits on the electricity side of the business, and that the fee 
proposed by Pareja was unreasonable. 
 
Flower Sector 
------------- 
 
¶11.  (C) A representative of a U.S. flower company said that 
Ecuadorian flower exports were down because of weakening demand in 
major markets, which is accentuated in new markets in Eastern Europe 
which have experienced sharp currency devaluations as well.  In 
addition, Ecuadorian producers are facing increased competition from 
African producers where labor costs are much lower, which has been 
exacerbated by sharp increases in the minimum wage in Ecuador in 2008 
and 2009.  He said that given the loss of competitiveness of the 
Ecuadorian flower sector, the best outcome for that sector would be 
if Ecuador abandoned the dollar, although he acknowledged that could 
cause problems for other sectors. 
 
Tourism 
------- 
 
¶12.  (C) The manager of the Marriott hotel said that business at his 
hotel was down 16% from the prior year.  He said that his hotel had 
let a limited number of staff go. 
 
Industrial Imports 
------------------ 
 
¶13.  (C) The manager of an Ecuadorian company that imports valves and 
other types of industrial piping from the U.S. said that overall 
business has weakened.  He added that some sectors, such as the food 
processing industry, continue to invest, in part to take advantage of 
new market opportunities created by higher tariffs on consumer goods. 
 He said that in the current uncertain business environment, 
companies had to hoard cash, be lean (his company has reduced staff 
by 15%), and look for new opportunities. 
 
Consumer Goods 
-------------- 
 
¶14.  (C) The representative for Energizer said that his company 
imports batteries and a range of toiletry goods.  He said that like 
GM, his company realized a jump in sales in December and January as 
Ecuadorian distributors stocked up in anticipation of price 
increases; he expects limited sales in the upcoming months.  The 
exception was batteries, where imports were also blocked for almost 
two months by the new Ecuadorian certification requirements, which 
were then lifted. 
 
¶15.  (C) He said that in addition to selling to large Ecuadorian 
chains, his company sells to small shops.  He said that he has seen 
growing arrears with the small stores.  The small stores have had to 
increase the credit they extend to their customers, largely because 
of falling income due to declining remittances.  This in turn leads 
the small stores to fall behind on payments to suppliers such as 
Energizer. 
 
Textiles 
-------- 
 
¶16.  (C) The U.S. owner of a local textile company said that the 
textile sector was doing well and benefited from the trade 
restrictions on imported clothing, although he stressed that his 
industry did not ask for the restrictions.  His company will increase 
investment to take advantage of the opportunities.  He added that his 
sector did ask for tighter labeling requirements, which the GOE has 
begun to implement, as a measure to crack down on contraband. 
 
Information Technology 
---------------------- 
 
¶17.  (C) The U.S. owner of an Ecuadorian information technology (IT) 
company said that the business outlook for his sector was uncertain. 
Overall investment was down, but some business were increasing IT 
investment to improve efficiency.  He said that some of the 
investment was in labor-saving technology as companies looked to 
reduce their payrolls. 
Comment 
------- 
 
¶18.  (C) This was the most somber meeting the Embassy has had with 
the U.S. Business Forum in recent years, as U.S. companies grapple 
with the challenges of a global economic downturn that appears likely 
to create a difficult business environment in Ecuador in 2009.  This 
is further complicated by Ecuadorian trade barriers as well as 
regulatory uncertainty for key sectors such as petroleum and banking. 
 Even so, most companies still see business opportunities in Ecuador 
and will manage their companies to minimize the upcoming risks and to 
take advantage of the opportunities that present themselves. 
 
Hodges 

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