ECUADOR,S NEW ECONOMIC CZAR: SCUFFED GOODS,

C O N F I D E N T I A L QUITO 001803

SIPDIS

SIPDIS

TREASURY FOR SGOOCH
DEPT PASS TO USTR

E.O. 12958: DECL: 07/20/2016
TAGS: ECON EC ECON EFIN ENRG EPET ETRD PGOV PINR PREL
SUBJECT: ECUADOR,S NEW ECONOMIC CZAR: SCUFFED GOODS,
POLISHED PRESENTATION

REF: A. A) QUITO 1669


B. B) QUITO 1680

C. C) QUITO 1722

D. D) QUITO 1735

Classified By: EconOff Josh M. Cartin for Reason 1.4(b) and (d)


1. (C) Summary: New Ecuadorian Economy Minister Armando Rodas
recently presented a sober six-month economic plan, lending a
technocratic polish to an appointment painted in politics.
End summary.


2. (C) On July 17, Ecuadorian Minister of Economy and Finance
Armando Rodas (for biodata, see reftel A) presented his
economic plan to President Palacio. Rodas was named Minister
on July 7 after a cabinet reshuffle that also saw the
departure of the Ministers of Trade and Government. Rodas,
predecessor, Diego Borja, had become associated too closely
with the controversial Hydrocarbons Law, of which he was a
key architect, and had difficulty in leading its
implementation. Rodas is Palacio,s fourth Economy Minister
in his little over one year as President.


3. (C) Rodas has remained unruffled in the face of Borja,s
recriminations against Palacio after his dismissal. Neither
has Rodas responded to Borja,s accusations that his strings
are being pulled by now dismissed Presidential Secretary Jose
Modesto Apolo (reftel B). He has also managed to sidestep an
investigation by the Attorney General for his involvement in
the investor-friendly, June 29 version of the regulation of
the Hydrocarbons Law (reftel C).


4. (C) Despite public warnings from the outgoing Borja to the
contrary, Rodas has apparently not steered away from Borja,s
relatively austere fiscal program, vowing not to increase
total government spending from current levels. Rodas also
adjusted downward by approximately $200 million Borja,s
earlier projected gains from changes to the Hydrocarbons Law.
(Comment: Two theories prevail as to the discrepancy in the
Hydrocarbons Law windfall: industry contacts tell us Borja's
numbers were inflated, so the downward revision probably
reflects a more accurate projection of tax collection from
the new law, and Rodas is working hard to burnish his
technocratic credentials by projecting fiscal conservatism;
the possibility also exists that the forecasted windfall has
not diminished, but now is being manipulated downward to
facilitate future, extra-budgetary "disbursements". End
comment.)


5. (C) Rodas announced that he would allocate more money to
social programs, from $285 million to $380 million, which
will reduce the government's fiscal surplus target this year
from $556 million (1.4% of GDP) to $417 million (1.2% of
GDP). In a more ambitious step, Rodas proposed setting up a
trust fund that would reinvest revenues from Occidental
Petroleum's former Block 15, estimated at $838 million, into
the energy sector, to help guarantee production targets,
improve outdated refining capacity, and to reduce subsidies
and the deficit in the electricity sector. Rodas plans to
present these plans to Congress as an urgent proposal after
August 6.


6. (C) The Ambassador met Rodas coincidentally at a recent
dinner at the Korean Embassy. Rodas appeared busy, ambitious
and fully engaged with his job. He said that he knows he is
a short-timer but is anxious to achieve some positive results
during his six months in office. He lamented, however, that
he has been unable to fill positions within the ministry due
to the brevity of the term of office. He mentioned that one
major priority was to encourage Congress to pass the
Electricity Law, the ratification of which may have a
positive impact on the interests of key US investors in
Ecuador (reftel D). During the dinner, he received several
telephone calls from members of the Congressional committee
working on this issue.


7. (C) In conversation, Rodas echoed the standard GOE lines
about both the ATPDEA extension: that it,s a "drug issue,
not a commercial issue"; and the "Hinchey-Markey Amendment"
recently passed by the House: that it reflects a unilateral
decision by the US Congress to renegotiate petroleum
exploration agreements.


8. (C) Comment: Ecuador's ability to meet Rodas, economic
targets will depend largely on Petroecuador's ability to
maintain petroleum production levels in Block 15, as more
than 75% of the government,s windfall revenues resulting
from both the change to the Hydrocarbons Law and the
cancellation of Oxy,s contract depends on net proceeds from
crude exports from Oxy's former fields. Although Rodas has
projected responsibility in his public pronouncements and
appearances, there will be little public enthusiasm for
fiscal austerity in the run-up to the elections, and we doubt
his ability to make any substantive accomplishments during
his short term in office. Moreover, we are concerned that
his reportedly close ties to Jose Modesto Apolo portend a
willingness to use his position for personal gain. End
comment.
JEWELL