ECUADOR CENTRAL BANK POSTS ROBUST GROWTH DATA

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