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Identifier
Created
Classification
Origin
09QUITO348
2009-05-14 20:19:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Quito
Cable title:  

ECUADOR CENTRAL BANK POSTS ROBUST GROWTH DATA

Tags:   ECON  EFIN  EC 
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VZCZCXYZ0021
RR RUEHWEB

DE RUEHQT #0348/01 1342019
ZNR UUUUU ZZH
R 142019Z MAY 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0365
INFO RUEHBO/AMEMBASSY BOGOTA 8138
RUEHCV/AMEMBASSY CARACAS 3542
RUEHLP/AMEMBASSY LA PAZ AUG LIMA 3196
RUEHGL/AMCONSUL GUAYAQUIL 4318
						UNCLAS QUITO 000348 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EC
SUBJECT: ECUADOR CENTRAL BANK POSTS ROBUST GROWTH DATA

REFTEL: 08 QUITO 505

UNCLAS QUITO 000348

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EC
SUBJECT: ECUADOR CENTRAL BANK POSTS ROBUST GROWTH DATA

REFTEL: 08 QUITO 505


1. (SBU) Summary: According to the Ecuadorian Central Bank data,
Ecuador's economy grew 6.5 percent in 2008. This strong growth was
driven by heavy public spending. The economy contracted slightly in
the fourth quarter due to pressure from the global financial crisis.
End summary.


2. (SBU) The Central Bank released updated 2008 GDP data in April,
and increased its estimate for 2008 GDP growth to 6.5%, up from its
earlier estimate of 5.3%. This strong growth was seen across all
the main GDP components, as seen in the table below. The government
spending component led the way, growing by 11.6%. However, strong
government spending spilled over to the other components as well,
since government spending drove investments, and a large increase in
public sector salaries and other government spending passed through
to increased private spending as well. (Total central government
expenditures increased 67% over 2007.) That spending across the
board in turn fed into strong demand for imports.


3. (SBU) However, the economy contracted by 0.3% in the fourth
quarter, with notable weakening in all components except government
spending.

GDP, by major components, annual % change

Period GDP Private Gov't Invest Import
- Spend Spend
2007 2.5 3.5 6.1 2.5 7.3
2008 6.5 7.0 11.6 16.1 10.2

GDP, by major components, 2008, quarterly % change

Q1 0.5 1.0 1.8 -1.8 -2.1
Q2 2.3 1.5 2.7 6.5 4.5
Q3 0.8 2.2 3.0 5.4 7.1
Q4 -0.3 0.9 2.7 1.0 -0.4


4. (SBU) Looking at economic performance by industry, it is evident
that the strong growth in 2008 was mainly driven by increased public
spending. The three sectors that registered the strongest growth
all benefited from government spending: public spending,
electricity, and construction. The latter two sectors were driven
by a sharp increase in public infrastructure investment.
Electricity sector growth, which was also driven in part by a
reduction in electricity prices, slowed down in the last two
quarters after a new hydro-electric project shut down just a year
after it was opened due to construction faults.



5. (SBU) The banking sector also grew strongly. It did not benefit
directly from government spending, but government spending increased
liquidity in the economy, which resulted in increased deposits which
in turn supported expanded credit. Other sectors, such as
agriculture, industry, and commerce also grew at strong rates,
ranging between 5-6%.


6. (SBU) The "mining" sector is driven principally by petroleum
production. In 2007, poor performance of the petroleum sector
dragged down overall growth, while in 2008 the sector was flat and
therefore less of a drag. In the petroleum sector, private oil
companies decreased production, while Petroecuador increased its
production.


7. (SBU) On a quarterly basis, most sectors began to show slippage
in the fourth quarter, including those such as electricity and
construction, which had benefited from government spending.
Agriculture, fishing, commerce and transport also showed weak growth
or declining production in the fourth quarter. Only public spending
held up in the last quarter of 2008.


8. (U) The following table shows some of the main industrial
sectors:

Period Public Elect. Const'n Financial Mining
Spend Intermed.
2007 5.9 15.5 0.1 8.0 -4.8
2008 14.6 12.7 13.8 11.2 0.0

Q1 2008 2.9 3.8 0.1 1.9 -0.5
Q2 2008 3.4 6.8 5.0 2.6 -1.8
Q3 2008 3.9 -8.2 4.1 3.0 -1.0
Q4 2008 3.7 -0.9 0.2 1.7 -0.2


9. (SBU) Comment. Economic growth in Ecuador in 2008 was
surprisingly strong, especially the recent upward revision in the
growth estimate. Clearly growth was driven by strong government
spending, and that carried over to the private sector as well,
particularly to those that catered to domestic demand that was
supported by government spending. However, growth in the important
petroleum sector was constrained by minimal private investment since
foreign companies are uncertain about their future in Ecuador
because of ongoing contract renegotiations.


10. (SBU) Comment, continued. It remains to be seen whether the
most recent GDP estimate for 2008 will hold up. Local analysts
expressed concerns about the Central Bank's calculations and
suggested that release of growth data before the elections might
have been politically motivated. President Correa criticized the
Central Bank's methodology in 2008 and called for review (reftel).
However, the Central Bank has not disclosed any changes to its GDP
methodology and we do not have any reason to believe that it made
any changes. Even so, in the past, it has used estimated government
expenditures as proxies for actual production in several key
sectors, pending collection of final data. In general,
implementation of government projects have lagged behind
appropriation of funds, and the government appears to have retracted
some of its appropriations at the end of the year because of growing
fiscal pressure. As a result, actual production in sectors that
rely on government spending might have been less than suggested by
initial Central Bank estimates.

HODGES