VZCZCXYZ0021
RR RUEHWEB

DE RUEHQT #0348/01 1342019
ZNR UUUUU ZZH
R 142019Z MAY 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0365
INFO RUEHBO/AMEMBASSY BOGOTA 8138
RUEHCV/AMEMBASSY CARACAS 3542
RUEHLP/AMEMBASSY LA PAZ AUG LIMA 3196
RUEHGL/AMCONSUL GUAYAQUIL 4318

UNCLAS QUITO 000348 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EC
SUBJECT: ECUADOR CENTRAL BANK POSTS ROBUST GROWTH DATA 
 
REFTEL:  08 QUITO 505 
 
¶1. (SBU) Summary:  According to the Ecuadorian Central Bank data, 
Ecuador's economy grew 6.5 percent in 2008.  This strong growth was 
driven by heavy public spending.  The economy contracted slightly in 
the fourth quarter due to pressure from the global financial crisis. 
 End summary. 
 
¶2. (SBU) The Central Bank released updated 2008 GDP data in April, 
and increased its estimate for 2008 GDP growth to 6.5%, up from its 
earlier estimate of 5.3%.  This strong growth was seen across all 
the main GDP components, as seen in the table below.  The government 
spending component led the way, growing by 11.6%.  However, strong 
government spending spilled over to the other components as well, 
since government spending drove investments, and a large increase in 
public sector salaries and other government spending passed through 
to increased private spending as well.  (Total central government 
expenditures increased 67% over 2007.)  That spending across the 
board in turn fed into strong demand for imports. 
 
¶3.  (SBU) However, the economy contracted by 0.3% in the fourth 
quarter, with notable weakening in all components except government 
spending. 
 
GDP, by major components, annual % change 
 
Period  GDP  Private  Gov't   Invest  Import 
-            Spend    Spend 
2007   2.5   3.5      6.1      2.5      7.3 
2008   6.5   7.0      11.6    16.1     10.2 
 
GDP, by major components, 2008, quarterly % change 
 
Q1    0.5    1.0      1.8     -1.8     -2.1 
Q2    2.3    1.5      2.7      6.5      4.5 
Q3    0.8    2.2      3.0      5.4      7.1 
Q4   -0.3    0.9      2.7      1.0     -0.4 
 
¶4.  (SBU) Looking at economic performance by industry, it is evident 
that the strong growth in 2008 was mainly driven by increased public 
spending.  The three sectors that registered the strongest growth 
all benefited from government spending:  public spending, 
electricity, and construction.  The latter two sectors were driven 
by a sharp increase in public infrastructure investment. 
Electricity sector growth, which was also driven in part by a 
reduction in electricity prices, slowed down in the last two 
quarters after a new hydro-electric project shut down just a year 
after it was opened due to construction faults. 
 
¶5.  (SBU) The banking sector also grew strongly.  It did not benefit 
directly from government spending, but government spending increased 
liquidity in the economy, which resulted in increased deposits which 
in turn supported expanded credit.  Other sectors, such as 
agriculture, industry, and commerce also grew at strong rates, 
ranging between 5-6%. 
 
¶6.  (SBU) The "mining" sector is driven principally by petroleum 
production.  In 2007, poor performance of the petroleum sector 
dragged down overall growth, while in 2008 the sector was flat and 
therefore less of a drag.  In the petroleum sector, private oil 
companies decreased production, while Petroecuador increased its 
production. 
 
¶7.  (SBU) On a quarterly basis, most sectors began to show slippage 
in the fourth quarter, including those such as electricity and 
construction, which had benefited from government spending. 
Agriculture, fishing, commerce and transport also showed weak growth 
or declining production in the fourth quarter.  Only public spending 
held up in the last quarter of 2008. 
 
¶8.  (U) The following table shows some of the main industrial 
sectors: 
 
Period  Public  Elect. Const'n  Financial  Mining 
        Spend                   Intermed. 
2007      5.9    15.5    0.1      8.0      -4.8 
2008     14.6    12.7   13.8     11.2       0.0 
 
Q1 2008   2.9     3.8    0.1      1.9      -0.5 
Q2 2008   3.4     6.8    5.0      2.6      -1.8 
Q3 2008   3.9    -8.2    4.1      3.0      -1.0 
Q4 2008   3.7    -0.9    0.2      1.7      -0.2 
 
¶9.  (SBU) Comment.  Economic growth in Ecuador in 2008 was 
surprisingly strong, especially the recent upward revision in the 
growth estimate.  Clearly growth was driven by strong government 
spending, and that carried over to the private sector as well, 
particularly to those that catered to domestic demand that was 
supported by government spending.  However, growth in the important 
petroleum sector was constrained by minimal private investment since 
foreign companies are uncertain about their future in Ecuador 
because of ongoing contract renegotiations. 
 
¶10.  (SBU) Comment, continued.  It remains to be seen whether the 
most recent GDP estimate for 2008 will hold up.  Local analysts 
expressed concerns about the Central Bank's calculations and 
suggested that release of growth data before the elections might 
have been politically motivated.  President Correa criticized the 
Central Bank's methodology in 2008 and called for review (reftel). 
However, the Central Bank has not disclosed any changes to its GDP 
methodology and we do not have any reason to believe that it made 
any changes.  Even so, in the past, it has used estimated government 
expenditures as proxies for actual production in several key 
sectors, pending collection of final data.  In general, 
implementation of government projects have lagged behind 
appropriation of funds, and the government appears to have retracted 
some of its appropriations at the end of the year because of growing 
fiscal pressure.  As a result, actual production in sectors that 
rely on government spending might have been less than suggested by 
initial Central Bank estimates. 
 
HODGES