PALACIO APPOINTS FOUR NEW MINISTERS

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 002970

SIPDIS

E.O. 12958: DECL: TEN YEARS
TAGS: PGOV PINR ECON EFIN PREL EC
SUBJECT: PALACIO APPOINTS FOUR NEW MINISTERS

REF: A. QUITO 02814

B. QUITO 02863

Classified By: PolOff Rosemary Macray for reason 1.4 (b&d)



1. (U) Summary: Following weeks of speculation, President
Palacio on December 29 named new economic, education, health
and housing ministers. The most significant change to USG
interest is the naming of flower sector businessman Diego
Borja as Minister of Economy and Finance, replacing Magdalena
Barreiro. Ivan Zambrano, head of the Northern Border
Development Organization, takes the helm in the Ministry of
Health. Hector Velez, an undersecretary in the Housing
Ministry, moves to that ministry's top spot. Raul Vallejo
will return to the office of Education Minister, which he
held previously under President Rodrigo Borja. Considered
with the earlier naming of Interior Minister Castillo, these
changes appear to complete the president's year-end cabinet
renovations and could signal new investments in social
spending. End Summary


2. (SBU) New Minister of Economy and Finance Diego Borja
hails from the leadership of Expoflor, Ecuador's largest
association of flower growers. Although Borja is considered
by most of our contacts to be on the left side of the
political spectrum, we have not seen evidence of that in our
relations with him over the past few years. As President of
Expoflor, perhaps the producer association most dependent on
exports to the U.S. and the ATPDEA, Borja has been a forceful
and vocal supporter of the FTA negotiations. We have been
told by mutual acquaintances that Borja accepted the
appointment on the condition that Palacio would provide him
with the political support necessary to cut back the current
budget, bringing it into line with the Fiscal Transparency
Law. That would be a strong positive sign of responsible
fiscal intentions.


3. (C) Barreiro told the Ambassador in their first meeting,
some four months ago, that she did not expect to last in the
Ministry beyond December. She said someone with more
political stature would be needed to deal with the increased
pressures for spending of the upcoming election year. She
told EconCouns a month ago that she did not trust volatile
President Palacio not to fire her on the spot on any given
day. Last week she told Commercial Counselor that she would
resign within two weeks to begin the teaching year at the
University of San Francisco (a local private university)
where she taught before moving to the ministry. Pressure was
building for Barreiro's removal from the mayors of Ecuador's
three largest cities, Guayaquil, Quito and Cuenca. Barreiro
has resisted the decision by the Ecuadorian Congress to
reclassify oil revenue as current, rather than capital,
income, which resulted in that revenue being subject to a 15
percent preassignment to the three city governments. This
windfall is expected to be a major boon for electoral
aspirations of the political parties that control the three
municipalities (the Social Christians and Democratic Left).


Biographic Information on New Ministers
--------------


4. (U) Raul Vallejo returns to the post of Education
Minister where he served with the Leftist Democratic Party
(ID) in the early 1990s under President Borja. Born in Manta
in 1959, Vallejo received his master's degree at the
University of Maryland on a Fulbright-Laspau scholarship.
Prior to this latest cabinet appointment, Vallejo was
professor of literature at University Andean Simon Bolivar in
Quito and rector of Liceo International. He writes
occasional editorials for the Quito daily "El Comercio" and
has written numerous novels.


5. (U) Health Minister Ivan Zambrano, 35, worked closely
with USAID officials during his short tenure as executive
director of the Northern Border Development Unit. The
Guayaquil native has a long friendship with Palacio, a fellow
medical doctor from Guayaquil. Recently however Zambrano has
concentrated his energies more on business than medicine,
marketing Lexmark, Intel and Microsoft products. He's
described as having a hands-on management style and as
promoting U.S. business practices. As director of the
Northern Border Development Unit he frequently visited
project sites and met with USAID and Embassy officials.
Minister of Housing Hector Velez previously served as
Undersecretary in the Ministry's Office of Land Surveying.

Comment
--------------

6. (SBU) We are sorry to see Barreiro go. She was a
fiscally responsible and competent minister, who rebuilt
relations with us and the IFIs in the wake of a disastrous
predecessor (Rafael Correa, now running for president).
Given the mounting political pressures to increase spending
in an election year, we will encourage Borja to maintain
fiscal discipline. This is particularly important as
Barreiro, via a debt placement in New York and a loan from
the FLAR, has obtained close to $1 billion which she intended
to use to roll over debt. We worry that an irresponsible
finance minister could embark on a fiesta of spending, rather
than setting the fiscal house in order for the next
government.

JEWELL