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### Viewing cable 08QUITO374, ECUADOR ECON WEEKLY: FALLING FDI, REVISED PRICE CONTROLS,

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08QUITO374 | 2008-04-25 21:37 | 2011-05-02 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Quito

`

    VZCZCXYZ0020
    PP RUEHWEB

    DE RUEHQT #0374/01 1162137
    ZNR UUUUU ZZH
    P 252137Z APR 08
    FM AMEMBASSY QUITO
    TO RUEHC/SECSTATE WASHDC PRIORITY 8765
    INFO RUEHBO/AMEMBASSY BOGOTA 7528
    RUEHCV/AMEMBASSY CARACAS 3006
    RUEHLP/AMEMBASSY LA PAZ APR LIMA 2574
    RUEHGL/AMCONSUL GUAYAQUIL 3519
    RUEATRS/DEPT OF TREASURY WASHDC

` `

    UNCLAS QUITO 000374

    SIPDIS

    SENSITIVE
    SIPDIS

    TREASURY FOR MEWENS

    E.O. 12958: N/A
    TAGS: ECON EINV EPET EAGR EFIN EC
    SUBJECT: ECUADOR ECON WEEKLY:  FALLING FDI, REVISED PRICE CONTROLS,
    SOCIAL SECURITY TO INVEST IN GOVERNMENT PROJECTS

    REF: A) Quito 191 B) 07 Quito 2277 C) Quito 36
    D) Quito 365

    ¶1.  (U) The following is a weekly economic update for Ecuador that
    reports notable developments that are not reported by individual
    cables.

    Investment Outflows Driven by the Petroleum Sector
    --------------------------------------------- -----

    ¶2.  (SBU) Net foreign direct investment (FDI) in Ecuador declined
    34% in 2007 ($178 million vs. $271 million in 2006).  The first
    three quarters of 2007 appeared to reflect a modest recovery (reftel
    a) from already poor performance in 2006.  However, the fourth
    quarter of 2007 showed a net outflow of almost $300 million.  Net
    FDI (inflows minus outflows) for 2007 was the lowest in at least six
    years, and down sharply from the peak of $871 million in 2003.

    ¶3. (SBU) The petroleum sector accounted for the large drop in FDI in
    the last quarter of 2007.  The mining/petroleum sector registered
    $483 million in outflows for the quarter, more than erasing the
    small net inflows in the first part of the year (the sector for the
    year as a whole had $418 million in net outflows).  We understand
    that much of the outflow was repatriated profits, which some
    analysts say is an annual practice.  However, the investment
    situation was clearly aggravated when the windfall income tax was
    increased to 99% in October (reftel b).  Almost all the petroleum
    companies froze their investment plans after the announcement, so
    they did not have any incentive to retain profits in country to pay
    for future investments.  In addition, we understand private drilling
    companies have shipped many of their drilling rigs out of Ecuador,
    which may show up as an investment outflow, and clearly signals that
    the private petroleum companies will not be resuming investment in
    the near future.

    Price Controls for Milk
    -----------------------

    ¶4. (U) On April 23, the Correa administration made its first
    adjustment to the milk price controls it imposed in January (reftel
    c).  It raised the maximum prices by five cents/liter in several
    categories, and eliminated price controls on the most upscale
    category of milk, long life ultrapasteurized milk in one liter
    boxes.  It did, however, impose price controls on ultrapasteurized
    milk in less expensive packaging, leading one producer to complain
    that he may have to stop producing the less expensive version.

    Social Security to Invest in Government Projects
    --------------------------------------------- ---

    ¶5.  (U) The Ecuadorian Social Security Institute (IESS) announced
    that it will invest $578 million of its assets in petroleum,
    electricity and mining projects.  It will reportedly invest $100
    million in developing a field in Block 15 (which was seized from
    Occidental Petroleum in 2006) and $50 million in Coca Codo Sinclair,
    Ecuador's largest hydroelectric project.  The Minister of Mines and
    Petroleum suggested that IESS could invest in the to-be-established
    state mining company (reftel d).

    ¶6.  (SBU) Comment:  In part, it appears that the government would
    like to use IESS savings to fund some of its ambitious investment
    program, but it also looks like the IESS board is looking for
    potentially better returns.  Currently, the pension fund is invested
    in Central Bank accounts and government bonds, which garner a low
    rate of return, and the government has reduced the volume of bonds
    that it is placing with IESS.  At this time, the government has more
    cash than it can spend, given its limited ability to implement
    investment programs, high petroleum revenue and increased control
    over the old petroleum funds.  But if it can ever increase its
    capacity to implement projects, it may need to rely on IESS funds as
    well.

    Speculation about New Debt Issuance
    -----------------------------------

    ¶7.  (SBU) Financial analysts report there is a growing expectation
    in Ecuador's financial community that Finance Minister Fausto Ortiz
    might restructure some of Ecuador's external debt in 2008 or 2009,
    although there is no suggestion he will do so in the near future.
    Ecuador risk spreads fell after the GOE abandoned suggestions it
    might default and instead regularly paid its debt obligations.
    Ortiz publicly suggested that the GOE may be ready to issue new
    bonds in 2009.  If so, Ecuador could use the new bonds to replace a

    portion of its outstanding commercial debt, which carry relatively
    high interest rats; two of the issuances included call options that
    give the government the right to retire some of the debt.  Visiting
    investment analysts have said that there might be appetite for a new
    Ecuadorian placement, but only after investors have seen the new
    constitution.

    Petroecuador Unable to Spend Its Investment Budget
    --------------------------------------------- -----

    ¶8.  (U) Petroecuador reported low budget spending for the first two
    months of 2008.  As a result, on April 16, Petroecuador's Board of
    Directors announced the creation of a budget-monitoring commission.
    According to the company, it had budgeted $115.3 million in
    investment for January and February, or 7% of total investment
    planned for 2008 ($1.7 billion).  Instead, it spent only $49.6
    million on investment.  Also between January and March, Petroecuador
    spent $577.9 million on current expenses; $435 million of this was
    used to import oil derivatives.  The Ministry of Petroleum and Mines
    expressed frustration that the state-owned company has not been able
    to move forward with its joint rehabilitation of the mature Sacha
    field with Venezuelan petroleum company PDVSA.

    JEWELL

`