NEW ECUADORIAN FINANCE MINISTER PLEDGES FISCAL

C O N F I D E N T I A L QUITO 000125 SIPDIS SIPDIS DEPT FOR WHA/AND E.O. 12958: DECL: 01/17/2016 TAGS: EFIN EPET PGOV EINV EC SUBJECT: NEW ECUADORIAN FINANCE MINISTER PLEDGES FISCAL PRUDENCE Classified By: ECONOMIC COUNSELOR LARRY L. MEMMOTT, REASONS 1.4 (B,D) ¶1. (C) Summary: In a meeting with the Ambassador, new Ecuadorian Minister of Finance Diego Borja affirmed his commitment to responsible fiscal policy and expressed his interest in promoting microfinance. The Ambassador expressed U.S. support for holding the spending line in a difficult electoral year and raised difficult commercial disputes with the minister. While hopeful, we continue to await actions by the minister before concluding that he will work to contain fiscal pressures. The IBRD, also visiting Quito last week, seemed taken with Borja and enthusiastic about disbursing (after a long dry spell). Borja,s actions will govern our response to the proposed IBRD projects. End Summary. ¶2. (U) The Ambassador called upon new Minister of Economy and Finance Diego Borja (the third Minister of Finance of the nine-month-old Palacio government) on January 12. Although billed as a courtesy call, the meeting quickly turned substantive, with discussion of fiscal policy, microcredit, and commercial disputes between the U.S. and Ecuador. The Minister was accompanied by Vice Minister for Economic Policy Pablo Paez. Fiscal Responsibility the Watchword -------------- ¶3. (U) After congratulating Borja on his appointment, the Ambassador asked about his plans for the Ministry. Borja responded that he intended to implement a conservative fiscal policy. President Palacio was aware of that intent, and agreed. The Ambassador noted that it will be difficult to hold the line during an election year. "My team and I are here only as long as we have the political support to maintain a responsible policy," Borja responded. ¶4. (U) Borja asked for U.S. assistance with what he described as a top priority, creation of private watchdog organizations on the local level to watch over the spending of local governments. (Although the local governments receive almost all of their funds from the central government, there is very little central government oversight over use of the funds.) The Ambassador suggested an early meeting with the USAID director to explore possibilities. ¶5. (C) Borja noted that one of his initiatives will be promoting microfinance via a national fund to provide guarantees for institutions operating in this market. The Ambassador noted that USAID is very involved in the microfinance sector and would like to be in touch on the issue. She said we were also very worried about the impact a recently-revived banking law could have on microfinance and on the finance sector as a whole. Borja said he was also concerned about this law and asked whether the USG could make its opposition to the law known to the Social Christian Party, which is pushing the legislation. Commercial Disputes -------------- ¶6. (SBU) The Ambassador noted that the U.S. also has various commercial disputes in which the Ministry has a role to play. She pointed out that U.S. electric companies Duke Energy and Machala Power each are owed tens of millions of dollars by the GOE. While Duke also owes the GOE a similar sum, allowing for the accounts to be cancelled, Machala is awaiting a decision by the Ministry of Finance for a partial payment. Borja said he was aware of the debts to Duke and Machala, but not of the pending partial payment. He promised to look into it. (We have confirmed that the memorandum proposing the payment is on the desk of the Vice Minister of Finance, Fabian Carrillo, who is scheduled to meet with Machala representatives on Thursday.) ¶7. (C) President Palacio had told us he had asked Borja to look over the proposed Occidental Petroleum deal with the GOE (resolving the long-pending contract cancellation threat), the Ambassador said. Borja acknowledged that he had done so, but noted that the Oxy issue is not legally before his ministry and said that he would not have anything official to do with the issue. The Ambassador pointed out that the implications of expropriation of Oxy assets for Ecuador would be devastating. Paez inserted himself into the conversation to ask rhetorically whether Oxy was a U.S. state-owned enterprise. Ambassador noted that the issue, rather, was what expropriation of Oxy by the GOE could do to U.S. and Ecuadorian interests. Fiscal Responsibility the Watchword? -------------- ¶8. (SBU) The Ambassador had met with a visiting IBRD team led by Marcelo Guigale on January 11. Guigale and his team said they had been very impressed with Borja and his commitment to fiscal responsibility. The IBRD had six major policy loans pending with the GOE and Guigale asked for Embassy assistance with the GOE to get the bureaucratic wheels to move on the conditions and other approvals for the loans and with the USED to help get the loans approved. While most of the loans were project-oriented, one would provide $100 million in budget support to the GOE. ¶9. (C) We are getting conflicting reports as to the fiscal stance of the new minister. According to former Vice Minister of Finance Ramiro Galarza, inside sources have told him that Borja proposed to President Palacio some $300 million in reductions in the 2006 budget which could be implemented by decree. He also reportedly proposed $650 million in debt buybacks (beyond scheduled rollovers). In stark contrast, Borja's Vice Minister of Finance, Fabian Carrillo (strictly protect),told a USAID contractor that he does not expect to last long at the ministry. He said he was working hard for fiscal responsibility, but that Borja and Paez wanted to escape that straightjacket. Comments: Still an Enigma -------------- ¶10. (C) The Embassy has known Diego Borja for years in his capacity as president of Expoflores, the largest grouping of flower growers. That said, we have never been able to develop a clear understanding of his views. He supported the FTA negotiations with the U.S. in public, sometimes forcefully (a must for the leader of the flower growers). . Although forceful on fiscal responsibility both in the press since assuming the ministry and with the IBRD and us in private, we are still inclined to withhold judgment until we see real action. The IMF will be in town this week, and their review of the numbers may provide more ground truth. JEWELL