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### Viewing cable 08QUITO191, Foreign Investment Flows into Ecuador: 2007 Better than a

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08QUITO191 | 2008-02-28 13:01 | 2011-05-02 00:12 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

`

    VZCZCXYZ0005
    PP RUEHWEB

    DE RUEHQT #0191/01 0591322
    ZNR UUUUU ZZH
    P 281322Z FEB 08
    FM AMEMBASSY QUITO
    TO RUEHC/SECSTATE WASHDC PRIORITY 8513
    INFO RUEHBO/AMEMBASSY BOGOTA 7347
    RUEHCV/AMEMBASSY CARACAS 2883
    RUEHLP/AMEMBASSY LA PAZ FEB LIMA 2393
    RUEHGL/AMCONSUL GUAYAQUIL 3318

` `

    UNCLAS QUITO 000191

    SIPDIS

    SENSITIVE
    SIPDIS

    E.O. 12958: N/A
    TAGS: EINV EPET ECON EC
    SUBJECT:  Foreign Investment Flows into Ecuador:  2007 Better than a
    Bad 2006

    Ref.  A) Quito 192, B) 07 Quito 2277

    ¶1.  (SBU) Summary.  Foreign direct investment in Ecuador totaled
    $471 million in the first nine months of 2007.  This reflects a
    rebound from 2006, when the net investment flows were reduced by the
    departure of U.S. and Canadian oil companies.  As a result,
    investment in petroleum and from the U.S. and Canada showed an
    improvement in 2007.  Foreign investment declined in most other
    sectors in 2007, and investment from a number of other important
    sources (Brazil, Mexico, Europe) also declined in 2007.  End
    summary.

    ¶2.  (SBU) According to Ecuadorian Central Bank (BCE) data, foreign
    direct investment for the first three quarters of 2007 ($470.8
    million) was higher than the same period in 2006 ($124.2 million).
    The 2007 data appear to reflect a modest recovery from a
    particularly poor performance in 2006, when the assets of Occidental
    Petroleum were seized and Canadian petroleum company Encana sold its
    assets to a Chinese company.  These developments show up as net
    outflows in 2006 for the petroleum sector and for U.S. and Canadian
    investment.  In contrast, the petroleum sector showed net inflows in
    2007, as did investment from the U.S. and Canada.

    ¶3.  (SBU) Leaving aside the experience of U.S., Canadian and
    petroleum investment, the data for 2007 show a mixed but generally
    declining trend for FDI in 2007.  Investment from Brazil, Mexico,
    and Europe dropped in 2007, although that from China increased from
    a very low level in 2006.  Investment in the manufacturing, commerce
    and transport/communications sectors also dropped in 2007, although
    investment in services did increase.  Furthermore, FDI in 2007 was
    lower than it was from 2002-04, when annual FDI averaged $830
    million.

    ¶4.  (U) The following tables show FDI data for selected countries
    and sectors.  Data are for the first nine months of each year.
    Totals include all FDI and therefore exceed investment for the
    countries and sectors shown.

    FDI flows by country/region
    U.S. dollars, millions
    January-September

    Year        2006      2007

    U.S.      -124.1      67.5
    Brazil     244.3     141.0
    Canada    -253.0      23.4
    Mexico      42.6     -40.2
    Europe      62.0      42.1
    China        2.9      50.4
    Total      124.2     470.8
    .
    FDI flows by sectors
    U.S. dollars, millions
    January-September

    Year                      2006      2007

    Petroleum/mining        -236.6     282.2
    Manufacturing             46.6      30.8
    Commerce                  84.4      70.4
    Services                  53.7      70.0
    Transport/communications  94.9     -16.0
    Total                    124.2     470.8

    Source for 2007 Investment
    --------------------------

    ¶5.  (U) We understand that the European and Chinese oil companies
    continued to invest, although at reduced rates, for the first three
    quarters of 2007.  Only after the Correa administration increased
    the windfall oil income tax to 99% (reftel b) in October did the
    companies freeze their investment plans (that impact would appear in
    fourth quarter data which we have not yet seen).

    ¶6.  (SBU) One major investment project, construction of the new
    Quito airport, continues to move forward.  According to the airport
    consortium, Quiport, the investors disbursed $44 million in 2007,
    much of which came from the U.S., with the balance from Canada and
    Brazil.  We also understand that some U.S. companies, particularly
    those outside the more contentious regulated sectors, continued with
    their investment plans in 2007.  For example, Pfizer opened a new
    $50 million facility.  Others told us that they were making
    investments to address bottlenecks or introduce labor-saving
    equipment out of concern that labor costs could rise.

    ¶7.  (U) Brazilian companies are currently the largest investors in

    Ecuador.  In addition to Petrobras, the large Brazilian construction
    firms Odebrecht and Andrade Gutierrez are active in Ecuador.
    Andrade Gutierrez is a partner in Quiport, and the two companies are
    some of the most important contractors for major government
    infrastructure projects.

    ¶8.  (SBU) One economic analyst speculated that reduced lending to
    Ecuador, following the Correa Administration's statements in early
    2007 that it might default on some loans, led to increased FDI.  He
    argued that companies which previously relied on loans had to
    replace some of those loans with capital.  While we have not seen
    much evidence to reinforce this theory, it seems plausible.  One
    U.S. oil company still operating in Ecuador lost its bank loan.  In
    addition, many Ecuadorian companies have kept their capital
    offshore, relying instead on tax deductible international loans.  It
    is possible that some of them also lost their loans and were forced
    to bring back some their capital, which may have been reported as
    foreign investment.

    Comment
    -------

    ¶9.  (SBU) In general, 2007 was considered a difficult year for
    investment, as the Correa administration spooked investors with its
    often harsh economic rhetoric, even though in practice most of its
    policies were more practical than its rhetoric (reftel a).
    Therefore it was a surprise to see that foreign direct investment
    picked up in 2007.  Some of that was due to a rebound from an even
    more difficult 2006, but after separating that out it appears that
    FDI continued last year, albeit at a reduced rate.

    ¶10.  (SBU) Much of last year's investment was already in the
    pipeline going into 2007.  Now most private investment in the
    important petroleum sector is frozen and the investment climate will
    remain uncertain until the government renegotiates contracts with
    the major oil investors.  After that, even if the new contractual
    structure is agreeable to the oil companies, it will take time for
    them to restore their investment programs.  We suspect we may see a
    similar picture in other sectors as well, since some companies have
    told us that they were completing planned investment but were
    placing new investment plans on hold until the investment
    environment became more predictable.

    JEWELL

`