FINANCIAL INSTITUTIONS NERVOUS ABOUT ECUADOR'S

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000945

SIPDIS

DEPT FOR WHA/AND
PLEASE PASS TO USTR

E.O. 12958: DECL: 04/27/2015
TAGS: PGOV ECON EFIN EC
SUBJECT: FINANCIAL INSTITUTIONS NERVOUS ABOUT ECUADOR'S
FISCAL POLICY

REF: QUITO 900

Classified By: Amb. Kristie A. Kenney for reasons 1.4 (b) and (d).


1. (C) Summary. Our meetings with the financial and business
sectors reveal uneasiness with the fiscal policies being
espoused by the new Minister of Finance, Rafael Correa
(Reftel). The international financial institutions (IFIs)
found Correa,s proposed economic remedies to be nave and
outdated. Citigroup Ecuador President noted that the Finance
Minister,s initial statements had hurt Ecuador's risk
ratings, but no capital flight had yet occurred. The local
American Chamber of Commerce is troubled about the GOE,s new
tone toward U.S. investors. All are taking a proactive
approach to the new administration, reaching out to key GOE
officials to promote dialogue. We are continuing to do the
same. End Summary.

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Financial Sector "Iffy" on Fiscal Policies
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2. (C) The Ambassador met with the leading international
financial institutions (World Bank, Inter-American
Development Bank, International Monetary Fund) and Citigroup
Ecuador President on April 26 to discuss the rhetoric and
proposed fiscal policies of the new Minister of Finance,
Rafael Correa. The IFIs had met with Correa earlier that day
and expressed genuine concern about his approach. Correa
grudgingly acknowledged the error of his initial rash and
hasty commentary, but nonetheless railed against the
Gutierrez government's fiscal policies, citing an increase in
unemployment from 8% to 12% and persistent poverty. He
advocated a more "activist" fiscal policy to stimulate and
protect job growth, by raising import duties and expanding
public bank loans. He told the IFIs that the GOE would pay
its international debts if it "has the liquidity".


3. (C) The IFIs heard Correa out, then gently pointed out
that Ecuador's historically low inflation is good for all
sectors of the economy, that export-led growth had been
proven more effective than protectionism, and that fiscal
discipline was necessary to attract investment. The World
Bank was particularly cautious because of its pending USD 100
million disbursement to Ecuador to promote fiscal
consolidation and competitiveness. The World Bank is coming
under increasing pressure to review and reconsider this
disbursement aimed at rewarding past government fiscal
behavior and, more importantly, to encourage and promote
future discipline he told the Ambassador. Correa, who seems
to have abandoned the possibility of changing the currency,
did not raise the issue of dollarization.


4. (C) The Citigroup President, also concerned, highlighted
some calming factors. First, there has not been a run on the
banks. He confessed that investors are nervous, but no one
is pulling out yet, mainly because of dollarization. He also
commented that the GOE is financially in good shape. It has
nine to ten months of cash reserves and is not facing tough
imminent spending choices - thanks to high oil prices.


5. (C) The Ambassador held a separate meeting with the
American Chamber of Commerce Steering Committee about what
they perceive as the government's anti-U.S. sentiment. The
Ambassador calmed these fears, noting that, during the entire
political drama, there were no anti-Amcit or U.S. business
security incidents. She felt, and AmCham members agreed,
that commercial disputes would be set back, as we have lost
our GOE interlocutors, those that were intimately familiar
with the disputes and moving on them. The reality, she
noted, is that we are starting over with this government and
all must begin to engage and educate the new players.

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Positive, Proactive, Pragmatic
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6. (C) The financial players all agreed that the three "P"s
should govern their approach to the new administration. By
engaging relevant Ministers early and often and promoting
productive and informative dialogue in a spirit of
cooperation, they stand a better chance of tempering bad
policy and avoiding rash decisions. The Merck Pharmaceutical
representative had concerns about President Palacio,s
predilection for socialized medicine, but he said that Merck
already knows President Palacio (a cardiologist) and the
Minister of Health well and will engage them to help inform
them about the pitfalls of this approach.

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Comment
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7. (C) The fact of the matter is that we and the IFIs must
deal with the new administration, if only to alert its
members to the risks of ill-considered policy options. We
have advised the IFIs and the private sector to be as
proactive as they can and to keep us abreast of progress or
shortcomings. We will continue to follow commercial disputes
closely. Although President Palacio struck a balanced tone
in his meeting with the Ambassador on bilateral issues,
others in his administration might not have found the
religion yet. We will do our best to convert them.

KENNEY