ECUADOR ECON WEEKLY: APRIL INFLATION; BANK OF THE SOUTH;

UNCLAS QUITO 000439 SENSITIVE SIPDIS TREASURY FOR MEWENS E.O. 12958: N/A TAGS: ECON EAID ETRD EINV EC SUBJECT: ECUADOR ECON WEEKLY: APRIL INFLATION; BANK OF THE SOUTH; MINING UPDATE; BANKING LAW CONSEQUENCES REF: A: QUITO 267; B: QUITO 365 ¶1. (U) The following is a weekly economic update for Ecuador that reports notable developments that are not reported by individual cables. Intervention of Banking Cooperative -------------- ¶2. (U) On May 7, the Superintendent of Banks announced that Mutualista Benalcazar, a mutual fund/ cooperative bank, had insufficient capital, temporarily suspended operations, and appointed an administrator. Benalcazar had 67,000 depositors and its deposits totaled $114 million, less than 1% of total deposits in the country. The Superintendency promised the cooperative would soon reopen to allow depositors to withdraw money, and sought a private bank to take over the cooperative's liabilities. However, no bank expressed interest (in part because it would have to assume the liabilities immediately but would only gain control of the cooperative's assets in four months). The Superintendent then reported that the government-owned Housing Bank would take over the institution. The Minister for Housing and Urban Development promised depositors would be paid up to $12,200. ¶3. (SBU) Comment: The suddenness of the Superintendency's decisions raises questions about its ability to monitor institutions and take appropriate actions to deal with weaker institutions. While the Superintendent reported that Benalcazar has a negative capital position, a USAID contractor that recently monitored the Superintendency's review of the cooperative said that it had cash flow problems because it was overextended with some large outstanding loans. ¶4. (SBU) Comment, continued: Benalcazar's problems also raise questions about whether it was affected by the new banking law that eliminated commissions and permits the government to lower interest rate ceilings. We do not know if that contributed to its problems, although according to one report it had relied on commissions for 82% of its profits. Benalcazar's problems alone will not cause systemic problems, and initial indicators are that customers are not pulling out of similar banking cooperatives. However, the elimination of commissions and lowering of interest rates will likely cause problems for smaller financial institutions, which tend to have higher costs than larger banks. Inflation on the Rise -------------- ¶5. (U) According to Ecuador's National Institute of Statistics and Census (INEC),monthly inflation in April reached 1.52%, with an annualized inflation of 8.8%. Inflation rose during the first two months of 2008 due in large part local natural disasters (ref. a). However, rising global inflationary pressure, particularly for food, is also driving the inflationary increase. The products that have the highest price increase are food consumption products like potatoes, consumable oil, vegetables and poultry. ¶6. (SBU) The government has denied that inflation will reach double digits, as predicted by some local analysts. One analyst said that his rough calculations show 14% annual inflation by the end of the year; he added that even if that guesstimate is high, he does not see how inflation will remain below double digits. He said that he also sees signs of inflationary pressure from the government's loose fiscal policy, saying that some of the inflation leaders are domestically produced foods with limited imported inputs. Ecuador's Contribution to the Bank of the South -------------- -- ¶7. (U) According to Minister of Finance Fausto Ortiz, Ecuador will contribute $400 million over 10 years to capitalize the Bank of the South. Ortiz said that in 2008 Ecuador will contribute $80 million. According to the press, Venezuela, Brazil and Argentina will contribute $2 billion each, with Uruguay contributing $400 million and Bolivia and Paraguay $100 million each, for a total of $7 billion. Ortiz reported that Ecuador, Uruguay, Bolivia and Paraguay will be able to borrow up to eight times their contribution, whereas the larger countries will only be able to borrow up to four times their contribution. Mining Mandate Creates Job Losses -------------- ¶8. (U) Following the adoption of the Mining Mandate by the Constituent Assembly (ref. b),mining companies announced that they were laying off many of their workers (the mandate cancelled many mining concessions and suspended most others until a new mining law is in place). For example, on April 29, Aurelian, a Canadian-owned company, announced that it would to reduce its workforce by 80%. ¶9. (U) On May 6, three thousand jobless miners protested in front of the Presidential Palace, rejecting the Mining Mandate. The GOE subsequently announced a plan to offer temporary employment to mining workers who lost their jobs because of the mandate, working on road construction. JEWELL