ECUADOR ECONOMIC NEWS: CHEVRON FILES FOR ABRITRATION, PLAN

UNCLAS QUITO 000938 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EINV EFIN EC SUBJECT: ECUADOR ECONOMIC NEWS: CHEVRON FILES FOR ABRITRATION, PLAN TO INCREASE MINIMUM WAGE, US$1 BILLION IN "NEW" RESERVES, MOODY'S UPGRADES GOE CREDIT RATING REF: A) QUITO 795; B) QUITO 816 ¶1. (U) The following is a periodic economic update for Ecuador that reports notable developments that are not reported by individual cables. This document is sensitive but unclassified. It should not be disseminated outside of USG channels and should not be posted on the internet. -------------- Highlights -------------- - Chevron Files for International Arbitration - Criticism of Concessions Granted to Foreign State Enterprises - Increase in Minimum Wage for Private Sector Employees - National Assembly Ratifies GoE Control over Central Bank - US$1 billion in Central Bank Pensions Claimed as Reserves - Rating Agencies upgrade Ecuador's credit rating -------------- Chevron Files for International Arbitration -------------- ¶2. (U) On September 23, Chevron filed an international arbitration claim against the government of Ecuador (GoE) before the Permanent Court of Arbitration in The Hague under the rules of the United Nations Commission on International Trade Law. Chevron claims Ecuador violated investment agreements, international law, and the terms of the U.S.-Ecuador Bilateral Investment Treaty, in particular by failing to provide fair and equitable treatment for U.S. investors. ¶3. (U) On the same day, an Ecuadorian court ruled that Judge Juan Nunez, the presiding judge in the $27 billion lawsuit pending against Chevron/Texaco in Ecuador, would not be removed from the case despite the judge's September 4 recusal request (Ref A). Nunez had sought to recuse himself from the trial after Chevron disclosed tapes implicating Nunez in a $3 million bribery scheme. Nunez has denied the allegations of bribery. ¶4. (U) Texaco, purchased by Chevron in 2001, had operated a concession in the Amazon region of Ecuador with state-owned oil company Petroecuador from 1964-1992. Chevron is seeking enforcement of settlement and release agreements the GoE signed with Texaco 1994 to 1998 absolving Texaco of further liability after it had completed certain remediation efforts. In support of its claims, Chevron cited in its September 23 press release statements in the Department's Investment Climate Report for Ecuador, such as, "Systemic weakness and susceptibility to political or economic pressures in the rule of law constitute the most important problem faced by U.S. companies investing in or trading with Ecuador" and that "Corruption is a serious problem in Ecuador." -------------- -------------- Criticism of Concessions Granted to Foreign State Enterprises -------------- -------------- ¶5. (SBU) The GoE has granted concessions on key projects in the petroleum and energy sectors to foreign state enterprises. Analysts have criticized the concessions claiming they were not open to competitive bidding and that the provisions of the contracts are not beneficial to Ecuador. ¶6. (SBU) In early September, China's Sinohydro was awarded a US$1.98 billion contract for construction of the Coca Codo Sinclair hydroelectric plant, the largest construction project in the nation's history. The plant will generate 1,500 megawatts of energy to be supplied to up to 75% of the country. A delegation from China's Ex-Im Bank arrived September 14 to initiate negotiation of the credit conditions for the project. The GoE expects eventually to obtain credit sufficient to cover 85% of the cost of the project with a repayment period of 10 years and a five-year grace period. After a meeting in Argentina on August 31, the GoE reportedly decided that the company Energia Argentina SA (Enarsa) did not have sufficient capital to continue its 30% participation in the Coca Codo Sinclair Project. Ecuador's Termopichincha holds 70% of the project's shares, and the GoE has announced plans to purchase the remaining 30% held by Enarsa. ¶7. (SBU) In the petroleum sector, the production rights for the Sacha petroleum block were awarded on September 3 to the newly formed mixed company Rio Napo, a joint company between Petroecuador (70%) and Petroleos de Venezuela (Pdvsa) (30%). The Sacha block is regarded as the most important in the country, producing close to 49,800 barrels per day. The contract was awarded despite a July 6 report by a high-level technical group from Petroproduccion -- the production arm of Petroecuador -- which concluded that the contract signed by Rio Napo contravenes the legal framework covering Petroecuador's activities and the country's constitution. ¶8. (SBU) The crux of the legal problem identified by this group appears to be the lack of a strategic alliance agreement between Petroecuador and Pdvsa. Other analysts are critical of the contract because Pdvsa is only expected to invest 30% of the US$651 million in needed investment over ten years to raise production to 70,000 barrels per day and stave off the 4% natural decline in production that would occur without any new investment. Analysts doubt Petroecuador's ability to supply the remaining funds for the necessary investment, although the Minister of Nonrenewable Natural Resources (previously known as Minister of Mines and Energy) claims Petroecuador has approved US$51.17 million of investments in the Sacha field this year. -------------- -------------- Increase in Minimum Wage for Private Sector Employees -------------- -------------- ¶9. (SBU) On August 15, President Correa announced that his government will set a new minimum wage. Correa said no company will be able to take profits unless all workers have received a "dignified wage," which would now be set at US$320 per month compared to the current minimum wage of US$218 per month. The GoE claims the new minimum wage will not result in an increase in unemployment and will enable families to cover their basic needs, estimated at US$519 for a household of four members, based on a factor of 1.6 people in the family earning a salary. Businesses contend that with benefits, such as the mandatory payment of a 13th and 14th month salary, the current minimum wage is actually close to US$270 per month and that an increase of only about 20% would provide a family with enough funds to cover basic needs. Richard Espinoza, Minister of Labor Relations, also announced that in two months the GOE will present an additional plan to increase wages more generally. Private sector representatives have told Post that they strongly disagree with the GoE's claim that the wage increase will not increase unemployment, and predict that entire sectors - such as cut flowers - could become uncompetitive. -------------- -------------- National Assembly Ratifies GoE Control over Central Bank -------------- -------------- ¶10. (U) On September 22, the National Assembly approved a change to the Monetary Regime Law, which redefines the role and structure of the Central Bank (CBE),officially reducing its independence. Under the new law, the CBE Board will be comprised of a Presidential delegate and five members of the GoE's economic team. In its new capacity, the CBE's economic policies will be subject to approval by the Executive. To a certain extent, this law formalizes the level of control the GoE had already been exercising over the CBE. -------------- -------------- US$1 billion in Central Bank Pensions Claimed as Reserves -------------- -------------- ¶11. (U) On September 18, during a radio interview, Minister of Finance Maria Elsa Viteri reported that the GOE's Technical Secretary for Transparency has determined that figures for the Treasury's unified account (held at the CBE) had heretofore not registered over US$1 billion associated with the pension fund of Central Bank employees. Viteri, a member of the CBE Board under the new Monetary Regime Law, announced that these funds will now be counted as part of the GOE's resources. No other government authorities have commented about this issue. ¶12. (U) The CBE currently registers cash balances of about US$1 billion, of which only US$131 million correspond to the CBE's employees' pension fund and are deposited in the Latin American Reserves Fund (FLAR),an international organization only allowed to receive public sector deposits. The $1 billion in cash balances also includes US$640 million in accounting gains for the valuation of gold reserve assets and US$230 million in cash balances for the operation of the CBE. These balances are currently registered on the CBE's balance sheet as its own assets and liabilities, and are not counted as Gross International Reserves. ¶13. (SBU) The motivation behind the Minister's statement is unclear, although it is likely connected to the GoE's previous announcement to redirect US$1.6 billion of reserves towards domestic investments (Ref B). Although accounting for these balances as reserves rather than the CBE's own assets/liabilities has no impact on the CBE's overall balance sheet or CBE capital levels, it may give the public impression that reserves are healthier than previously thought. Nevertheless, the reality is that any GoE attempt to use reserves or other CBE assets for domestic investment purposes would undermine the CBE's financial situation. -------------- -- Rating Agencies upgrade Ecuador's credit rating -------------- -- ¶14. (U) Moody's rating agency announced September 24 that it had upgraded its GoE global bond rating to Caa3, with stable outlook, from Ca with a developing outlook. Moody's raised the rating on Ecuador's defaulted bonds to C, from D, "reflecting recovery rates of around 35% for investors." This action follows Fitch Ratings decision in early September to upgrade Ecuador's "Long Term Issuer Default Rating" to CCC from Restricted Default (RD),which it was rated at the time of the GoE's announcement that it would stop servicing a portion of its external bond debt in December 2008. For both Moody's and Fitch, the new ratings are near the bottom of "speculative grade," and well below investment grade, despite Ecuador's very low post-default sovereign debt load. Moody's judges obligations rated Caa as of "poor standing and subject to very high credit risk," while Fitch considers CCC rated sovereign issuances as "highly vulnerable, very speculative bonds." ¶15. (U) These rating upgrades do not, to quote Goldman Sachs, "reflect an improvement in intrinsic creditworthiness but simply the fact that the politically motivated default and subsequent distressed buyback contributed to lower the external debt load and through it the probability that another credit event will take place." In its press release, Moody's highlights Ecuador's "poor track record of debt payment...and frequent statements about prioritizing social and other expenditures over debt payment," which suggests the risk of default on still outstanding bonds remains high. ¶16. (U) Moody's adds that "the Correa administration does not view debt service as a policy priority," and comments that incorporated in the rating, "the third-lowest on Moody's scale," are "concerns about Ecuador's ability to pay, related primarily to the sustainability of dollarization." "A loose fiscal policy, the lack of fiscal stabilization funds, limited access to market financing, and deposit flight could easily lead to a shortage of liquidity," and, "Ecuador's contentious approach towards foreign investment in the oil industry could, in the long-term, not only limit capital inflows but also hinder oil output, a vital contributor to Ecuador's economic growth." CHRITTON