VZCZCXYZ0000
RR RUEHWEB

DE RUEHQT #0645/01 2081549
ZNR UUUUU ZZH
R 271549Z JUL 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0678
INFO RUEHBO/AMEMBASSY BOGOTA 8284
RUEHCV/AMEMBASSY CARACAS 3653
RUEHLP/AMEMBASSY LA PAZ JUL LIMA 3332
RUEHGL/AMCONSUL GUAYAQUIL 4512
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS QUITO 000645 
 
SENSITIVE 
SIPDIS 
 
REF: A: QUITO 566 B: BOGOTA 2248 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EC
SUBJECT: ECUADOR NEWS: CABINET CHANGES; TAX REFORM; SAFEGUARDS ON 
COLOMBIAN IMPORTS; NEW OIL PIPELINE DEAL; NEW PRESIDENTIAL DECREE 
 
¶1.  (U) The following is a periodic economic update for Ecuador that 
reports notable developments that are not reported by individual 
cables. 
 
Cabinet Changes 
--------------- 
 
¶2. (U) On July 15, 2009, President Correa designated Ramon Espinel 
as the new Minister of Agriculture, replacing Walter Poveda. 
Previously, Espinel was the Under Secretary for Trade and 
Integration at the Ministry of Foreign Affairs.  Espinel is an 
Agricultural Engineer and has a PhD in Agricultural Economics from 
the University of California at Berkeley.  He is an agricultural 
research professor at a local university.  Espinel aims to promote 
change in the agricultural structure; he said that agriculture 
should be seen from a poverty reduction perspective. 
 
¶3. (U) On July 14, Esteban Albornoz became the new Electricity 
Minister, replacing Alexksey Mosquera.  Albornoz is an Electrical 
Engineer who graduated from the University of Cuenca and has a PhD 
in Electrical Engineering from a university in Argentina. 
Previously, Albornoz was the head of a state power generation 
holding company, Ecuador's Electric Corporation (Celec), the 
President of Hidropaute and a university professor.   Albornoz wants 
Ecuador to double its hydroelectric generation capacity and cease 
energy purchases from Colombia.  According to the press, former 
Electricity Minister Mosquera was criticized by several technicians 
and specialists in the electric sector for poor management of the 
Coca-Codo Sinclair Hydroelectric Project. 
 
New Tax Reform 
-------------- 
 
¶4. (U) The GOE is preparing a tax law reform proposal to submit to 
the National Assembly. It is uncertain when the proposal would be 
submitted.  The proposal includes hikes on luxury taxes, a new 
minimum corporate income tax of 7 percent and an increase on capital 
outflow taxes from 1 percent to 2 percent on every money transfer. 
The hikes in the luxury tax would impact cigarettes, alcohol and 
soft drinks, as a way to deter consumption of unhealthy products. 
According to Carlos Marx Carrasco, Director General of Ecuador's 
Internal Revenue Services (SRI), the tax reform aims to "improve 
equity levels, decrease tax evasion, reduce commercial deficit, and 
promote production and employment." 
 
¶5. (U) The minimum corporate income tax would be 7 percent on a 
company4s probable annual profit, to be paid irrespective of whether 
a company has profit or not that year.  Currently, companies pay an 
advance on annual corporate income tax at mid-year equivalent to 7 
percent of probable profits, which is refunded if the tax due at the 
end of the year is lower than the advance.  While many businessmen 
and economic analysts object to the new minimum corporate income 
tax, the National Assembly, dominated mainly by the pro-government 
movement Proud and Sovereign Fatherland (PAIS) movement, is likely 
to approve the reform. 
 
Safeguards on Colombian Imports 
-------------------------------- 
 
¶6. (SBU) Since July 13, Ecuador is applying foreign exchange 
safeguards to Colombian imports.  For the GOE this measure is 
justified as the devaluation of Colombian currency has significantly 
affected Ecuadorean products' competiveness in the Colombian market 
(ref. A). However,  several importers and businessmen have expressed 
the opinion that this decision could be linked to diplomatic 
disagreements between Ecuador and Colombia and not just be aimed at 
maintaining competitiveness with Colombia. 
 
¶7. (SBU) According to several economic analysts, during the last 
seven years, the revaluation of Colombian currency has favored 
Ecuador, especially in 2007 and 2008. Despite a devaluation at the 
end of 2008, Ecuadorian products' competitiveness with Colombia 
improved in 2Q 2009, as the revaluation of the peso has made 
Colombian products more expensive.  In addition, Ecuador's 
commercial deficit with Colombia has declined during the last few 
months.  Therefore, there is little technical evidence to support 
Ecuador's exchange safeguards.  Colombian authorities have 
threatened to apply trade retaliations against Ecuadorian exports 
(ref B). 
 
Ecuador Wants New Pipeline Deal with Foreign Firms 
--------------------------------------------- ----- 
 
¶8. (U) On July 11, President Correa announced that Ecuador wants to 
renegotiate a contract with the foreign oil companies controlling 
the Heavy Crude Oil Pipeline (OCP), because according to him, OCP 
has evaded taxes.  Repsol YPF (Spain), Petrobras (Brazil), Perenco 
(French with US partner Burlington) and Andes Petroleum (China) have 
stakes in the OCP.  President Correa stated that OCP's construction 
was financed with loans of the company's partners and international 
private banks as a way to evade taxes.  According to Germanico 
Pinto, Minister of Petroleum and Mines, total construction costs are 
$1.4 billion, of which $1 billion was funded by loans from 
international private banks, and the remainder by the OCP's 
shareholders. 
 
New Presidential Decree on Public Contracts 
------------------------------------------- 
 
¶9. (U) Under new Ecuadorian Presidential decree 1793 issued on June 
20, any company headquartered in a tax haven country will not be 
permitted to receive government contracts.  According to the SRI, 
some OCP members have their headquarters in the Cayman Islands, a 
tax haven country. 
 
 
HODGES