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RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHQT/AMEMBASSY QUITO

UNCLAS QUITO 000814 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EFIN EC
SUBJECT: ECUADOR ECONOMIC NEWS: CORREA ANNOUNCES NEW ECONOMIC 
MEASURES, CENTRAL BANK CUTS 2009 GDP GROWTH ESTIMATES, CAN RULES ON 
ECUADORAN SAFEGUARDS ON COLOMBIAN IMPORTS 
 
REF: QUITO 566 
 
¶1. (U) The following is a periodic economic update for Ecuador that 
reports notable developments that are not reported by individual 
cables.  This document is sensitive but unclassified.  It should 
not be disseminated outside of USG channels and should not be 
posted on the internet. 
 
 
 
---------- 
 
Highlights 
 
---------- 
 
 
 
-- President Correa Announces New Economic Measures 
 
-- Central Bank cuts 2009 GDP growth estimate 
 
-- GoE Fiscal Deficit in 2009 
 
-- IMF allocation of SDRs to Ecuador to support GoE budget 
 
-- Reorganization of Central Bank Board of Directors 
 
-- CAN rules on GoE safeguards on Colombian imports 
 
 
 
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President Correa Announces New Economic Measures 
 
--------------------------------------------- --- 
 
 
 
¶2. (SBU) On August 26, President Correa announced that the GoE was 
submitting that same day a tax reform package to the National 
Assembly for its approval.  He explained that these tax reforms 
were part of broader GoE measures to "face the international 
crisis," including reducing the current account deficit, using 
international reserves to fund domestic investment, promoting 
social justice, combating tax evasion, and boosting productive 
sector and internal demand.  During his August 26 comments, Correa 
voiced his optimism about the economy, predicting GDP growth of 2% 
and annual inflation lower than 4%. 
 
 
 
¶3. (SBU) Within the tax reform package, a handful of measures have 
received the most attention: 1) the increased tax on money 
remittances from 1% to 2%, aimed at stemming capital outflows, 
which totaled US$ 4.9 billion in 2008 and have already exceeded US$ 
5 billion so far in 2009; 2) the planned repatriation of US$ 1.6 
billion in international reserves to support domestic investments 
aimed at boosting economic activity; 3) the establishment of a 
minimum corporate income tax and a 10% tax on shareholder dividends 
of companies with high profit levels.  (See septels for additional 
details on the tax reform plan and the GoE's plan to use 
international reserves to fund domestic investment.) 
 
 
 
¶4. (SBU) Private analysts note that the overall goal of this tax 
reform package and the broader measures taken by the GoE are to 
generate revenues to cover the fiscal deficit, limit the current 
account deficit, and redistribute income.  Many observers are 
critical of the August 26 announced measures, noting that 
increasing the tax on capital flows is unlikely to reduce outflows, 
which are high due to uncertainty about the economy and GoE 
policies.  There is also concern that the GoE's decision to close 
positions in liquid short-term international assets and invest them 
in medium-term illiquid domestic assets will undermine financial 
stability and increase Ecuador's vulnerability to external shocks. 
Finally, many analysts disagree with Correa's optimistic growth 
estimates, with some expecting annual growth below even the Central 
Bank's 1% estimate. 
 
 
 
------------------------------------------ 
 
Central Bank cuts 2009 GDP growth estimate 
 
------------------------------------------ 
 
 
 
¶5. (U) On August 24, Karina Saenz, General Manager of Ecuador's 
Central Bank (BCE), revised downward the BCE's estimate for 2009 
annual real economic growth to 1%, from its previous estimate of 
3.5%.  Although Saenz mentioned that "Ecuador has overcome the 
worst of the crisis" and would compare well this year against other 
countries in the region, the downward revision reflects the BCE's 
admission that the Ecuadoran economy has experienced a sharp 
downturn since late 2008, after posting 6.5% real growth in 2008. 
 
 
 
¶6. (SBU) According to available Ecuadoran Central Bank data on 
quarterly GDP, the economy contracted 1.62% in the first quarter of 
2009, compared to the fourth quarter of 2008.  Many local 
private-sector economists argue that Ecuador's recession began in 
the fourth quarter of 2008, with GDP falling an estimated 0.25% 
(quarter-over-quarter).  However, Central Bank President Carlos 
Vallejo has argued publicly that GDP at the end of the first 
quarter of this year registered real growth of 1.19% year-over-year 
(resulting from the statistical carryover of relatively strong 
growth during the second and third quarters of 2008), and he 
continues to predict positive real growth for full-year 2009 in the 
range of 2%. 
 
 
 
¶7. (SBU) According to Central Bank estimates of economic activity, 
the country has experienced a sharp contraction in non-oil sectors 
of the economy, compared to previous years.  The BCE estimates that 
during 2009 "construction and public works" will contract against 
2008, from an annual increase of almost 14% to an estimated decline 
of 1%.  Similarly, the growth rate of "government services" 
plummeted from almost 15% in 2008 to an estimated 2.5% in 2009. 
These reflect the GoE's inability to copy what it did in 2008 and 
drive economic growth through government expenditures.  The BCE 
also expects limited growth but substantially lower than in 2008 in 
private investment, financial services, and manufacturing.  The BCE 
expects "oil and mining" to continue their recent trend of 
declining year/year at a rate of 4-5%. 
 
 
 
-------------------------- 
 
GoE Fiscal Deficit in 2009 
 
-------------------------- 
 
 
 
¶8. (SBU) According to Ecuador's Constitution, the GoE must submit 
the 2010 budget to the National Assembly within 90 days of 
President Correa's August 10 inauguration.  The GoE is also 
obligated to provide the National Assembly with estimated fiscal 
program plans for 2011-2013.  Finance Minister Viteri confirmed 
during a September 1 press conference that her Ministry is working 
on 2009 and 2010 budgets, with the goal of submitting both of them 
to the National Assembly in early November.  Viteri commented that 
the 2009 budget, which was never approved by the legislature, is 
based on a US$ 35.5 per barrel price for Ecuadoran oil, whereas the 
average to date in 2009 is significantly higher at US$ 45/bbl.  She 
noted that the 2010 budget will be based on a US$ 61/bbl oil price. 
 
 
 
¶9. (SBU) There are varying estimates for the size of the GoE's 
fiscal deficit in 2009, a calculation complicated by the lack of 
the 2009 budget, the Finance Ministry's lengthy delay in publishing 
budget data, and the increase in recent months in the price of 
crude oil.  The well-known local think tank "Fiscal Policy 
Observatory" estimates the fiscal deficit through July 2009 at US$ 
420 million.  However, this figure does not take into account GoE 
arrears to the social security agency (IESS) and delayed transfers 
to regional governments and to other public entities.  The Fiscal 
Policy Observatory, which has a reputation for being pessimistic, 
estimates these arrears at about US$ 600 million, and estimates 
that the full-year 2009 fiscal deficit could be as high as US$ 
2.5-3 billion. 
 
 
 
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IMF allocation of SDR to Ecuador to support GoE budget 
 
--------------------------------------------- --------- 
 
 
 
¶10. (SBU) As with all other IMF members, on August 27-28 Ecuador 
received its share of the IMF's general allocation of US$ 250 
billion in Special Drawing Rights (SDRs, or Derechos Especiales de 
Giro, DEGs, in Spanish).  Ecuador's allocation totaled 224.1 
million SDRs, or approximately US$ 350 million.  Ecuador will 
reportedly receive a second allocation of SDRs in September, valued 
at close to US 50 million, stemming from the Fund's planned US$ 33 
billion allocation of SDRs on September 9.  The disbursement has 
generated some controversy in Ecuador, given President Correa's 
strong criticisms of the IMF, and there has been some debate over 
whether Ecuador would accept the disbursement.  Central Bank Karina 
Saenz dismissed this controversy during a September 1 meeting with 
EconOffs.  She stated that not only has Ecuador accepted the SDRs, 
the BCE has already requested IMF assistance with trading these 
SDRs to another member country for hard currency.  Interestingly, 
Saenz noted that the resulting dollars will not be counted as 
international reserves on the BCE's balance sheet, as are Ecuador's 
existing stock of SDRs.  Rather, the BCE will transfer the funds 
directly to the GoE Treasury accounts at the BCE. 
 
 
 
--------------------------------------------- ---- 
 
Reorganization of Central Bank Board of Directors 
 
--------------------------------------------- ---- 
 
 
 
¶11. (U) On July 30, 2009, the National Assembly approved a law that 
reorganizes the Board of Directors of the Central Bank of Ecuador 
(CBE).  Ecuadorian President Correa's administration originally 
proposed the law, so it is assumed he will sign it and it will 
enter into effect by end-September.  The new law replaces the 
current board of five officials nominated by the President and 
confirmed by the National Assembly, with a fixed slate that does 
not require National Assembly approval.  The President will still 
name his representative as the BCE President, but other board 
members will be the Coordinating Minister for Production, 
Coordinating Minister for Economic Policy, the Minister of Finance, 
a representative of public financial entities, and the Secretary of 
National Planning.  President Correa has not yet announced whether 
he will retain Carlos Vallejo, the current President of the CBE, as 
his representative on the Board. 
 
 
 
--------------------------------------------- --- 
 
CAN rules on GoE safeguards on Colombian imports 
 
--------------------------------------------- --- 
 
 
 
¶12. (SBU) In January 2009, the GoE imposed WTO Balance of Payments 
(BOP) safeguard provisions on certain imports, arguing they were 
necessary to confront Ecuador's developing BOP crisis.  In July the 
GOE imposed further one-year emergency exchange safeguard measures, 
taking the form of additional tariffs ranging from 5% to 86% and 
targeting 1,346 Colombian products (Ref A).  The GoE justified this 
action as a necessary response to the 18.5% depreciation of the 
Colombian peso, which the GoE attributed to Colombian Central Bank 
measures.  The GoE argued that the weak Colombian peso undermined 
the competitiveness of Ecuador's dollarized economy, making 
Colombian exports to Ecuador cheaper. 
 
 
 
¶13. (SBU) On August 7, the Andean Community's (CAN) General 
Secretary ruled that Ecuador must remove its exchange safeguards on 
the 1,346 Colombian products within 15 days.  However, the CAN 
Secretariat appeared to take pains to avoid benefiting one country 
over the other, and also acknowledged that the Colombian currency 
devaluation between June 2008 and June 2009 had negatively affected 
Ecuadorian products' competitiveness.  It, therefore, authorized 
Ecuador to apply corrective measures on 666 Colombian products, 
subject to several rather vague conditions.  These conditions 
included the requirements that the corrective measures be 
transitory and applied only so long as the currency mismatch 
exists, and they cannot exceed the rate of devaluation in 
magnitude. 
 
 
 
¶14. (SBU) The GOE has complied with the CAN ruling and has 
developed a new list of 666 safeguards on Colombian products. 
Coordinating Minister for Production, Nathaly Cely, who traveled to 
Lima in early August to negotiate the safeguards issue with the CAN 
Secretariat, has stated publicly on several occasions that 
Ecuador's safeguard measures accomplished their intended objectives 
of reducing Ecuador's trade deficit.  According to Central Bank 
data, through June 2009, Ecuadoran imports are US$ 1.17 billion 
below their level during the equivalent period in 2008. 
HODGES