Minister Borja on GOE Response to the Economic Crisis

C O N F I D E N T I A L QUITO 000188 SIPDIS E.O. 12958: DECL: 03/16/2019 TAGS: EFIN ECON PREL EC SUBJECT: Minister Borja on GOE Response to the Economic Crisis Classified by Ambassador Heather Hodges. Reason: 1.4 b and d. ¶1. (C) Summary. During a courtesy call with the Ambassador on March 11, Diego Borja, Coordinating Minister for Economic Production, described the broad parameters of how the government will adjust its budget because of falling oil prices. The GOE plans to cut investment spending in half and constrain current expenditures by freezing wages. The government expects petroleum prices to rise in the second half of 2009, and that it can cover a $2.5 billion budget deficit by borrowing from regional lenders, the IDB, and the Ecuadorian Social Security Institute. He portrayed a government ready to make moderate budget sacrifices, but unwilling to make harder decisions such as firing public sector employees or cutting subsidies. Borja hinted that the government might rebuild relations with the World Bank or IMF in the second half of 2009. End summary. ¶2. (U) The Ambassador met Coordinating Minister for Economic Policy Diego Borja on March 11 for a courtesy call. She was accompanied by the Economic Counselor and the visiting Regional Treasury Attache. ¶3. (U) Borja opened by expressing his and his government's pleasure with the new U.S. administration, although he did not expand on this theme. ¶4. (C) In response to the Ambassador's question about how Ecuador has been affected by the global economic crisis, Borja said that growth in Ecuador will slow in 2009 to 2.3%, the low end of the government's growth forecast. He said that in contrast to previous economic difficulties, the Government of Ecuador would not allow the poor to bear the brunt of the economic problems. For example, he said, subsidies would not be cut in 2009. Some Budget Discipline -------------- ¶5. (C) Borja said the government's 2009 budget is based on an average price for Ecuador's petroleum blend of $35.50/barrel for the year. He acknowledged that the price is currently below that (note: it was around $28/barrel for the first two months),but the government expects oil prices to rise in the second half of the year. He added that government expenditure would have to be reduced, and that most of the reduction would take place on the capital side. The government would continue investment projects that had already started, and would prioritize any new investments. He said that overall capital expenditures in 2009 would be $2.8 billion dollars (note: capital expenditures in 2009 were approximately $6 billion). ¶6. (C) Borja said that the government would also constrain current expenditures. For example, he said that overall spending on public sector salaries would be roughly flat compared to 2008 (note: salary expenditures increased 38% in 2008),with a freeze on wage increases and prohibitions on government employees from pulling in two salaries or pensions, or from earning both a pension and salary. However, he said, the government would not fire public sector employees. Financing Sources -------------- ¶7. (C) Borja said that the government projects a $2.5 billion deficit in 2009. To cover that deficit, the government expects to borrow $1.5 billion from the InterAmerican Development Bank (IDB), the Andean Development Corporation (CAF, a regional development bank),and the Latin American Reserve Fund (FLAR, a regional IMF-like entity),receiving roughly $500 million from each lender. The government would cover the remaining $1 billion with domestic borrowing, essentially from the Ecuadorian Social Security Institute. ¶8. (C) When asked if the GOE would approach the World Bank, he said that the government might renew discussions with the World Bank in the near future to explore restoring a borrowing program for Ecuador. (Note: the World Bank has had a minimal program in Ecuador under the Correa administration, and Correa expelled the World Bank representative in 2007.) ¶9. (C) Borja said that the government's next contact with the International Monetary Fund (IMF) would be in the second half of 2009, and that it was an open question whether there would be an IMF staff visit to Ecuador. (Note: IMF staff participated in IDB meetings with Borja and Finance Minister Viteri in February in Washington, and Borja obtained President Correa's permission to provide key data on Ecuador's adjustment plans to the IDB and IMF. The information was shared through documents, GOE staff visits to Washington, and digital video conferences, according to IMF and IDB officials.) Mum on Debt Plans -------------- ¶9. (SBU) When the Ambassador asked about the government's plans to address the defaulted commercial debt, Borja said that the government would finalize its plans within a few weeks. He added that Finance Minister Viteri was in charge of that effort and would make the announcement, and that he could not comment further. Comment -------------- ¶10. (C) Borja, who became minister in late December, has established himself as the government's point man for developing a GOE fiscal response to the serious problems that Ecuador faces from the global economic crisis and the sharp fall in oil prices. The tone that he established in the meeting with the Ambassador was similar to his public message: there's a problem, the government is adjusting, but it won't be painful, we can find financing. He provided some details in the meeting that are not public (for example the estimated size of the deficit, the assumptions about oil prices, and the plan to seek $1 billion for the social security institute). ¶11. (C) However, in neither the private meeting nor public statements has Borja given any indication of how much the GOE is prepared to adjust government spending, or what the GOE would do if its optimistic assumptions on oil prices or external financing do not work out. Borja's cryptic comments about the World Bank and the IMF suggest the government might work with those institutions if need be, although to do so would require that Correa swallow his animosity to those institutions. Hodges