VZCZCXYZ0057
RR RUEHWEB

DE RUEHQT #1026/01 2931938
ZNR UUUUU ZZH
R 201937Z OCT 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0210
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHCV/AMEMBASSY CARACAS 0072
RUEHGL/AMCONSUL GUAYAQUIL
RUEHLP/AMEMBASSY LA PAZ OCT LIMA 0086

UNCLAS QUITO 001026 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV EFIN EC
SUBJECT: ECUADOR ECONOMIC NEWS: ECONOMY CONTRACTS, BALANCE OF 
PAYMENTS IMPROVES, ELECTRICITY SHORTAGES, REDUCTION OF SAFEGUARDS ON 
COLOMBIAN PRODUCTS 
 
REF: QUITO 060; QUITO 837; QUITO 938; CARACAS 1284 
 
¶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 
 
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- Ecuador's GDP Shrinks for Third Straight Quarter 
 
- Improvement in Balance of Payments 
 
- GoE Reduces Safeguards on Colombian Products 
 
- Brazil to Eliminate Tariffs on 3,200 Ecuadorian Products 
 
- Ecuador Could Face Electricity Shortages in Short-term 
 
- Ecuador to Use IMF SDRs to Fund Banco del Sur 
 
 
 
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Ecuador's GDP Shrinks for Third Straight Quarter 
 
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¶2.  (U) Ecuador's economy is experiencing a sharp recession after 
recording the third straight quarter of negative growth.  According 
to Central Bank (CBE) statistics, real GDP shrank on a 
quarter-to-quarter basis by 0.26% in the second quarter of 2009. 
This followed contractions of 1.31% and 0.25% in the first quarter 
of 2009 and the final quarter of 2008.  Eight of fourteen economic 
sectors reported quarterly contractions in the second quarter of 
2009: direct financial intermediation (-1.63%), commerce (-1.25%), 
agriculture (-0.92%), indirect financial intermediation (-0.79%), 
mining and oil (-0.57%), manufacturing (-0.49%), public 
administration (-0.35%), and other services (-0.09%).  The six 
sectors recording growth were: water and electricity (14.28%), 
private households (2.98%), construction (2.84%), transport and 
storage (1.95%), oil refining (0.89%), and fisheries (0.13%). 
Positive growth in the water and electricity sector reflected 
substantial government investment in basic services. 
 
 
 
¶3.  (U) On a year-over-year basis, the economy shrank by 1.06% in 
the second quarter, the first annual fall since the second quarter 
of 2003.  Eight economic sectors contracted on a year over year 
basis including petroleum refining (-7.17%), indirect financial 
intermediation (-6.24%), commerce (-4.13%), agriculture (-3.04%), 
and mining and oil (-2.2%).  There was growth in public 
administration (6.68%), construction (5.95%) and transportation and 
storage (3.52%) sectors. 
 
 
 
¶4.  (U) The continued contraction of Ecuador's economy largely 
reflects the fall in international oil prices from their highs in 
2008, and the impact of the global financial crisis.  In the second 
quarter of 2009, household consumption was down by 1.42% year over 
year, government expenditure by 0.28%, and private investment by 
2.57%.  The unemployment rate rose from 7.3% in December 2009 to 
8.3% in June 2009 with an additional 51.7% of the workforce 
 
 
 
considered as underemployed.  (Note, the unemployment rate 
continued to deteriorate reaching 9.1% in September.)  On the 
external side of the economy, imports fell by 6.32% while exports 
contracted by 0.06% during the second quarter of 2009, resulting in 
an improvement in the trade balance. 
 
 
 
¶5.  (U) The CBE has reduced its forecast of real GDP growth from 
3.5% to 1% for 2009, while the IMF projects a 1% real contraction. 
In 2008, the Ecuadorian economy grew by 6.5%.  Most analysts 
consider the CBE forecast to be optimistic considering the 
substantial growth that would be required in the last six months of 
the year to produce a 1% annual growth rate.  Private investment 
shows no signs of recovery and is dependent on government 
investment, which is constrained by limited resources.  Remittances 
continue to be lower than in 2008 and internal demand has been 
decreasing. 
 
 
 
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Improvement in Balance of Payments 
 
---------------------------------- 
 
 
 
¶6.  (U) Central Bank of Ecuador (CBE) statistics show an 
improvement in the country's global balance of payments, with a 
deficit reduction from US$ 1.33 billion in the previous quarter to 
a deficit of US$ 605 million in the second quarter of 2009. 
Ecuador's capital account deficit worsened in second quarter 2009, 
but was compensated by a larger than expected current account 
surplus. The GOE's repurchase of some global bonds during the same 
period caused international reserves to fall overall to about US$ 
2.6 billion as of end-June.  (Note, by early October international 
reserves had rebounded to about US$ 4.6 billion). 
 
 
 
¶7.  (U) Ecuador recorded a trade surplus of US$ 194 million for the 
second quarter of 2009 as exports expanded and imports declined. 
This compares to the trade deficit of US$ 735 million recorded in 
the previous quarter.  The trade surplus coupled with the 10% 
increase in remittances from abroad over the previous quarter 
brought the current account surplus to US$ 87 million, up from a 
deficit of US$ 889 million in the previous quarter.  Despite an 
increase in foreign direct investment in-flows, the deficit in the 
capital account increased from US$ 445 million in the first quarter 
of 2009 to US$ 692 million in the second quarter of 2009. 
 
 
 
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GoE Reduces Safeguards on Colombian Products 
 
-------------------------------------------- 
 
 
 
¶8.  (U) Effective October 15, Ecuador's Trade and Investment 
Council (COMEXI) removed exchange rate safeguards on 319 Colombian 
products. In January 2009, Ecuador imposed balance of payment (BoP) 
safeguard measures broadly on a number of imports (Ref A).  In July 
2009, the GoE decided that for 1,346 products from Colombia, it 
would apply the BoP safeguard tariffs on top of Ecuador's WTO bound 
tariff rate, instead of applying it to the preferential tariff rate 
Colombia normally enjoyed as one of Ecuador's Andean Community 
trading partners.  Ecuador justified the action claiming 
devaluation of Colombia's peso had unfairly damaged Ecuador's 
competitiveness.  After an Andean Community decision that went 
against Ecuador, the GoE reduced the number of affected products by 
roughly one-half and agreed to eliminate safeguards on the 
remaining products in three stages (Ref B).  Following the most 
recent action, safeguards remain on about 350 Colombian products. 
All safeguards are expected to be removed by the end of the year. 
 
 
 
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Brazil to Eliminate Tariffs on 3,200 Ecuadorian Products 
 
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¶9.  (U) On October 2, Ecuador's Vice Minister for Trade, Julio 
Oleas, announced that Brazil had agreed to eliminate tariffs on 
3,200 Ecuadorian products.  This measure, which still needs to be 
approved by the Latin American Association for Integration (ALADI), 
would benefit Ecuadorian exports of fish, mollusks, fruit, animal 
or vegetable fats and oils, cooked meat, vehicles and accessories 
and parts.  Bananas are not included on the list.  In 2008, Ecuador 
recorded a trade deficit with Brazil of about US$ 796 million. 
 
 
 
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Ecuador Could Face Electricity Shortages in Short-term 
 
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¶10.  (U) On September 29, Colombian Minister of Mining and Energy, 
Hern????n Martinez, announced that Colombia would gradually restrict 
electricity exports to Ecuador and Venezuela to better meet 
domestic demand.  Roughly 55% to 75% of the energy consumed in 
Ecuador is supplied by hydroelectric plants, 25%-32% by 
thermoelectric plants, with energy imports from Colombia 
fluctuating between 5% and 12%.  According to Ecuador's National 
Center for Energy Control (CENACE), energy demand in Ecuador ranges 
from 2,500 megawatts (MW) to 2,900 MW and is expected to grow at an 
annual rate of 5%. Ecuador currently only has about 3,000 MW of 
installed energy generation capacity with 500-1,000 MW out of 
commission at any one time. 
 
 
 
¶11.  (U) Initially the GoE had hoped to double energy generation 
capacity by 2012 through 17 planned projects.  However, many of 
these projects have been delayed.  The government's revised 
estimate is that seven of the 17 projects will come on-line by 2014 
to provide an additional 1,115 MW capacity.  Only four of these 
seven projects are currently under construction: Mazar, 
Toachi-Pilaton, Ocana, and Baba.  Together they would generate only 
an additional 456 MW.  The most advanced project is the US$460 
million, 160 MW hydroelectric power plant Mazar, which the GoE 
expects to have on-line by March 2010.  However, that will not 
adequately cover the loss of energy from Colombia.  The Baba 
hydroelectric plant, slated to enter operation by the end of 2010, 
will add only 42 MW in capacity.  Ocana (26 MW) and Toachi-Pilaton 
(228 MW) hydroelectric plants aren't expected to be operational 
until 2011 and 2014, respectively.  The GoE's largest electricity 
generation project on the books is the $2 billion Coca Codo 
Sinclair 1500 MW hydroelectric plant which will not be complete 
until 2015 or later.  In early September, China's Sinohydro was 
awarded the construction contract with financing by China's Ex-Im 
Bank (ref C). 
 
 
 
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Ecuador to Use IMF SDRs to Fund Banco del Sur 
 
--------------------------------------------- 
 
 
 
¶12.  (U) On September 27, Argentina, Brazil, Bolivia, Ecuador, 
Paraguay, Uruguay, and Venezuela signed the Constitution Agreement 
of the Banco del Sur during the Latin American and African 
Countries Summit on Margarita Island (Ref D).  President Correa has 
publicly described Banco del Sur as a mechanism to "finance 
 
 
 
development projects."  According to news reports, Banco del Sur's 
authorized capital will grow from US$ 7 billion to US$ 20 billion 
in ten years.  Argentina, Brazil and Venezuela will reportedly 
contribute US$ 2 billion each and, Bolivia, Ecuador, Paraguay and 
Uruguay will contribute lower, differing amounts.  Press reports 
note that although each country will have the same voting rights on 
the board of directors, loans greater than US$70 million will 
require the support of two thirds of the bank's paid capital voting 
rights, giving Venezuela, Argentina, and Brazil a larger 
representation.  According to Ecuador's Coordinating Minister for 
Economic Policy Diego Borja, Ecuador will contribute US$ 70 million 
per year for 10 years to the new bank.  The first contribution will 
be funded out of the roughly US$ 400 million Ecuador obtained 
through the IMFs allocation of Special Drawing Rights (SDRs) in 
August and September. 
HODGES