A Somber U.S. Business Forum Briefs the Ambassador

C O N F I D E N T I A L QUITO 000121

SIPDIS

USTR FOR BENNETT HARMAN

E.O. 12958: DECL:02/17/2019
TAGS: ETRD EINV EFIN EPET ECON EC
SUBJECT: A Somber U.S. Business Forum Briefs the Ambassador

Ref. A) Quito 98, B) Quito 60, C) Quit...



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date: 2/18/2009 20:41
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C O N F I D E N T I A L QUITO 000121

SIPDIS

USTR FOR BENNETT HARMAN

E.O. 12958: DECL:02/17/2019
TAGS: ETRD EINV EFIN EPET ECON EC
SUBJECT: A Somber U.S. Business Forum Briefs the Ambassador

Ref. A) Quito 98, B) Quito 60, C) Quito 22, D) 08 Quito 1178

Classified by Ambassador Heather Hodges. Reason: 1.4 b and d.


1. (C) Summary. On February 13, U.S. companies briefed the
Ambassador on the business climate in Ecuador. The tone was somber,
as the representative outlined challenges and risks, but also
opportunities for their companies, which are representative of many
business sectors in Ecuador. Most were concerned about weakening
demand in Ecuador and abroad, the risk of dedollarization, declining
export competitiveness, problems raised by restrictive Ecuadorian
trade measures, the need to take defensive positions by saving cash
and reducing workforces and, for the petroleum and banking sectors,
continued regulatory uncertainty. Not all was negative, however, as
the business representatives noted that the government heard their
concerns and gave them some relief on the trade restrictions, and
several noted that the trade restrictions will also provide
opportunities that some industries will be able to exploit. End
summary.


2. (U) The Ambassador met with the U.S. Business Forum on February

13. The U.S. Business Forum operates in parallel with the AmCham and
is focused on U.S.-owned or operated businesses, and provides the
participants an opportunity to exchange information on the current
business climate.

Autos
--------------


3. (C) The General Motors manager (GM) led off by discussing the
trade restrictions that Government of Ecuador imposed in January
(reftel b). He said that GM participated in the discussions the GOE
had with the private sector, and obtained some flexibility in GM's
quota by excluding imported kits that are used to assemble vehicles
for export, taxis or the government. However, GM declined to sign
the agreement that most large importers signed. The GM
representative noted that the trade restrictions complicate GM's
production management in the region, since GM coordinates production
between its facilities in Ecuador, Colombia and Venezuela, and now
the Colombian and Venezuelan plants face high tariffs in exporting to
Ecuador.


4. (C) The GM manager said that his factory had to shut down for
five days because the sudden imposition of new certification
requirements (reftel d) blocked the importation of a range of parts
used for auto assembly. He said that for one product the Ecuadorian
standard was 20 years old and no laboratory tests to that standard
anymore. He said his factory was on the verge of shutting down again
when the GOE temporarily lifted the certification requirement for six
months (reftel a).


5. (C) Turning to the current business climate, the GM manager said
that his sales were up 20% in January 2009 compared to January 2008,
the only GM unit worldwide to experience a sales increase. He
assumed the jump was because customers were anticipating a price
increase and/or because they were converting financial savings into
real goods out of a concern about pending financial sector
difficulties. He said that most sales were for cash, as financing
for auto purchases has sharply contracted.

Banking
--------------


6. (C) The Citibank representative stated that deposits in the
banking sector have declined, reflecting an overall decrease in
liquidity in Ecuador due to balance of payments and fiscal
constraints, plus withdrawals by clients who are concerned about
Ecuador's ability to maintain dollarization. She said that the
banking sector is protecting its liquidity by reducing lending, and
seemed to believe that overall the sector was sound. She was
concerned that several smaller banks were in a difficult position
and, if closed, might promote panic about the state of the overall
banking sector.


7. (C) Regarding the balance of payments pressure that Ecuador is
facing, the Citibank manager said that she is concerned that Ecuador
may go beyond the current 1% tax on transfers abroad and may impose
capital controls as some point.

Energy Sector
--------------


8. (C) The head of a local oil services company owned by a U.S.
citizen said that there was little investment in the petroleum
sector. Foreign oil companies had dramatically cut back on
investment in recent years with the imposition of windfall oil income
taxes, and more recently state-owned Petroecuador suffered a dramatic
cut in its investment budget because of falling oil income.


9. (C) The manager of Machala Power/EDC, electricity and natural gas
companies owned by Noble Energy, said that his company had reached an
agreement with the GOE whereby the GOE would pay Machala Power $70
million in arrears, and in turn Machala Power would withdraw its
international arbitration case (refel c). However, he has been
informed that that GOE no longer has sufficient cash and therefore
will not be making the payment.


10. (C) After the meeting, the Machala Power/EDC representative told
EconCouns that he is concerned about the GOE's approach to the EDC
gas company. In a recent meeting with Carlos Pareja, Under Secretary
for Petroleum, Pareja told him that President Correa has decided that
EDC's production contract should be converted to a service contract,
and EDC would be paid a fee of $2 for every thousand cubic feet (Mcf)
of gas produced. If not, Machala Power/EDC should "begin to pack its
bags." The representative said that currently EDC charges its sister
company approximately $3.75/Mcf, which is low in order to generate
profits on the electricity side of the business, and that the fee
proposed by Pareja was unreasonable.

Flower Sector
--------------


11. (C) A representative of a U.S. flower company said that
Ecuadorian flower exports were down because of weakening demand in
major markets, which is accentuated in new markets in Eastern Europe
which have experienced sharp currency devaluations as well. In
addition, Ecuadorian producers are facing increased competition from
African producers where labor costs are much lower, which has been
exacerbated by sharp increases in the minimum wage in Ecuador in 2008
and 2009. He said that given the loss of competitiveness of the
Ecuadorian flower sector, the best outcome for that sector would be
if Ecuador abandoned the dollar, although he acknowledged that could
cause problems for other sectors.

Tourism
--------------


12. (C) The manager of the Marriott hotel said that business at his
hotel was down 16% from the prior year. He said that his hotel had
let a limited number of staff go.

Industrial Imports
--------------


13. (C) The manager of an Ecuadorian company that imports valves and
other types of industrial piping from the U.S. said that overall
business has weakened. He added that some sectors, such as the food
processing industry, continue to invest, in part to take advantage of
new market opportunities created by higher tariffs on consumer goods.
He said that in the current uncertain business environment,
companies had to hoard cash, be lean (his company has reduced staff
by 15%),and look for new opportunities.

Consumer Goods
--------------


14. (C) The representative for Energizer said that his company
imports batteries and a range of toiletry goods. He said that like
GM, his company realized a jump in sales in December and January as
Ecuadorian distributors stocked up in anticipation of price
increases; he expects limited sales in the upcoming months. The
exception was batteries, where imports were also blocked for almost
two months by the new Ecuadorian certification requirements, which
were then lifted.


15. (C) He said that in addition to selling to large Ecuadorian
chains, his company sells to small shops. He said that he has seen
growing arrears with the small stores. The small stores have had to
increase the credit they extend to their customers, largely because
of falling income due to declining remittances. This in turn leads
the small stores to fall behind on payments to suppliers such as
Energizer.

Textiles
--------------


16. (C) The U.S. owner of a local textile company said that the
textile sector was doing well and benefited from the trade
restrictions on imported clothing, although he stressed that his
industry did not ask for the restrictions. His company will increase
investment to take advantage of the opportunities. He added that his
sector did ask for tighter labeling requirements, which the GOE has
begun to implement, as a measure to crack down on contraband.

Information Technology
--------------


17. (C) The U.S. owner of an Ecuadorian information technology (IT)
company said that the business outlook for his sector was uncertain.
Overall investment was down, but some business were increasing IT
investment to improve efficiency. He said that some of the
investment was in labor-saving technology as companies looked to
reduce their payrolls.
Comment
--------------


18. (C) This was the most somber meeting the Embassy has had with
the U.S. Business Forum in recent years, as U.S. companies grapple
with the challenges of a global economic downturn that appears likely
to create a difficult business environment in Ecuador in 2009. This
is further complicated by Ecuadorian trade barriers as well as
regulatory uncertainty for key sectors such as petroleum and banking.
Even so, most companies still see business opportunities in Ecuador
and will manage their companies to minimize the upcoming risks and to
take advantage of the opportunities that present themselves.

Hodges

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