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