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