UNCERTAINTY SLOWING INVESTMENT BY GUAYAQUIL

C O N F I D E N T I A L GUAYAQUIL 000088

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/10/2018
TAGS: ECON PGOV EC
SUBJECT: UNCERTAINTY SLOWING INVESTMENT BY GUAYAQUIL
BUSINESS SECTOR

REF: A. QUITO 152


B. QUITO 129

Classified By: Consul General Douglas Griffiths for reasons 1.4 (b) and
(d)


1. (C) SUMMARY: In the face of continued uncertainty about
Ecuador's regulatory environment and long-term policies,
Guayaquil's business sector is still holding off on the new
investment needed to foster growth and employment. Business
leaders expect continued underperformance in 2008,
considering that current high prices of Ecuadorian exports
ought to be driving strong growth. Most believe that the
Correa administration is wary of the private sector, but
opinions differ as to how damaging the policies have been and
what direction the government will take. The private sector
is frustrated by delays in building a new regulatory
framework and cautious of what may be coming, particularly
proposed restrictions on the already inflexible labor market.
In the end, for coastal business leaders used to working
around government regulations, the administration's failure
to define a clear direction for its economic program may do
more damage than any actual policies. END SUMMARY.

GUAYAQUIL BUSINESSES BEARISH FOR 2008(
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2. (C) In a round of meetings with Econcouns and Econoff on
March 31, prominent Guayaquil business leaders forecast a
poor business and investment climate in 2008, despite fairly
favorable external conditions. Worldwide prices of most
Ecuadorian exports, such as oil, shrimp, tuna and bananas,
are high, and Colombia and Peru are expected to post 5-7%
growth this year. However, Guayaquil's private sector agreed
with bearish IMF estimates for Ecuador that predict about
2.5% annual growth in 2008. Many believe that this is a
result of continued uncertainty about the new regulatory
framework and the Correa administration's long-term policies.



3. (C) Maria Gloria Alarcon, President of the Guayaquil
Chamber of Commerce, noted that most local businesses are in
a holding pattern until the country approves its new
constitution and President Rafael Correa makes his economic
agenda clearer. "The new labor laws approved by the
Constituent Assembly have a lot of businesses investing in
labor-saving machinery to replace workers who will soon
become more expensive," she explained. "But they are not
really investing to build additional capacity." Her father,
Paco Alarcon, separately told the Consul General that his
Venezuelan and Columbian partners have cancelled two planned
joint ventures due to the political uncertainty. Carlos
Andrade, Acting President of Guayaquil's Chamber of
Industries, said that some companies are investing to
maintain their core business sectors, but are not expanding
into new areas. He added that, ironically, the uncertainty
helps protect established companies, as its scares away new
entrants.

BELIEVE GOVERNMENT IS WARY OF PRIVATE SECTOR...
--------------


4. (C) Part of the uncertainty that is paralyzing investment
stems from difficulties in interpreting the government's
approach to the private sector. Guayaquil's business
community generally agrees that the new administration has
thus far not fostered a good environment for business and
investment. However, opinions differed as to just how
"anti-business" the administration really is. Some
interlocutors were frustrated by the numerous small
regulatory changes the government has imposed, which they
believe are chipping away at their ability to do business.
According to Guillermo Lasso, President of Banco de
Guayaquil, the GOE's bank policies are limiting access to
credit, especially for the poor. "Banks no longer have
access to the nationwide credit report database, so we are
operating in the dark and more hesitant to approve new
loans," he told Econcouns. "Lowering interest rate caps will
also restrict the supply of credit, unless the government
orders us to give more loans." Alarcon pointed to changes in
the licensing procedures for importers that have made it
harder to bring in goods from other countries. "They now
have to get additional approvals from the government to
import foreign products," she said. She also stated her
belief that Correa is using price controls on milk to
directly target her dairy products business, although she
acknowledged that her company mainly produces value-added
products that are not subject to the price controls.



5. (C) While Lasso and Alarcon are convinced the government
is implementing measures designed to hamper the private
sector, other business leaders offered more favorable
assessments of the Correa administration's reforms. For
example, Andrade opined that elements of the new tax law are
understandable, given the level of tax evasion. While the
law was drafted behind closed doors, the government did
consult with businesses about implementing the regulations.
"However, how the laws are implemented is the key," he
continued, referring to the tax law and other changes.
Walter Spurrier, Editor of the Weekly Analysis magazine and a
well known economic analyst, also felt that the situation was
not as bad many believe. "The coming year will not be good,
but it will not be cataclysmic either," he said. The local
Toyota and Chevrolet dealers told the Consul General that
they are having their best year on record in terms of sales
volume. Revenues are down after the Correa administration
dramatically increased taxes on luxury cars, but mass market
cars are selling in record numbers.

...BUT UNSURE OF GOVERNMENT'S LONG-TERM PLANS
--------------


6. (C) The business community in Guayaquil is also divided
over the direction Correa will take after the new
constitution is approved. Guillermo Lasso predicted that
"Correa will swing firmly to the left." Both he and Alarcon
expect the president to propose legislation that further
discourages investment after approval of the new constitution
and the expected national elections in late 2008. On the
other hand, the Chamber of Industries believes that Correa is
already backing off from some of the proposals from their
first year in office. "The government has learned that the
price controls are not working, and they are beginning to
move away from using them," said Jose Salvador, Executive
Director of the Chamber of Industries. Spurrier added that
many of the more economically leftist ministers have left the
government in recent months. The government's increase in
basic welfare payments, the minimum wage and a new program
that allows employees to borrow from their retirement
accounts have created a consumer boomlet. A housing
developer recently told the Consul General that his new low
to middle class housing developments on the outskirts of
Guayaquil are netting record sales, while his luxury
developments are unsold because the rich are waiting to see
what direction the government takes.

UNCLEAR WHAT NEW CONSTITUTION WILL BRING
--------------


7. (C) The other factor contributing to the private sector's
uncertainty and reluctance to invest is the fact that they
still have only vague ideas about the new regulatory
environment the Constituent Assembly will create. Although
the Assembly has approved a few measures relating to economic
matters, they have still only addressed these issues in broad
terms. Guayaquil's private sector was only able to offer a
few limited examples of what the changes might look like. "I
have it on good authority that the new constitution will go
after private property. It will stipulate that all property
needs to contribute to social welfare, which gives the
government a powerful tool to use against businesses,"
Alarcon said. Indeed, a draft text from the Assembly calls
for an economic model of "solidarity," though it is still
unclear what exactly that means.


8. (C) However, Pablo Lucio Paredes, a Quito-based economist
and delegate to the Constituent Assembly, said that he does
not expect extensive changes in economic provisions between
the current and new constitutions, arguing that the
constitution is not the appropriate tool to implement
Correa's economic vision. He did not anticipate any
appreciable change to the definition of private property
(Septel).

ECONOMY WILL CONTINUE TO UNDERPERFORM
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9. (C) COMMENT: The divergence of opinion of Guayaquil's
business leaders illustrates just how much uncertainty the
government's policies ) particularly the gap between
rhetoric and implementation (Reftel A and B) - have created.
Guayaquil's business community has decades of experience
dealing with (and finding ways around) government
regulations. But with no clear definition on even the broad
direction of the economic policy, investment and job creation
outside of the retail and construction sectors have largely

come to a stand-still, with negative repercussions over the
medium and long-term. Given the current high oil prices,
Ecuador's economy will probably continue to muddle along for
the rest of the year at its current pace. But when Ecuador's
neighbors are posting robust growth and only about 25 percent
of the country's workforce in the formal sector, just getting
by is not good enough.
GRIFFITHS