Ecuador Economic News February 8 - 12, 2010

UNCLAS QUITO 000190 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EPET EC SUBJECT: Ecuador Economic News February 8 - 12, 2010 REF: QUITO 154; 90 QUITO 816; 09 QUITO 1068 ¶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 -------------- -- Third Quarter 2009 GDP Growth of 0.26%; $332 Million Trade Deficit for 2009 -- GoE Plan to Use Reserves to Stimulate Construction Sector Falters -- Consumer Credit Card Debt Increases during Economic Downturn -- Fuel Smuggling Across Ecuador's Borders -------------- -------------- -------------- GDP Growth of 0.26% in the Third Quarter of 2009; Trade Deficit for 2009 -------------- -------------- -------------- ¶2. (SBU) Ecuador's Central Bank (CB) reported this week that the Ecuadorian economy grew on a quarter-to-quarter basis by 0.26% in the third quarter of 2009, but shrank 1.40% on a year-to-year basis. Although minor, this growth rate breaks a recessive economic trend after the Ecuadorian economy contracted by 0.25% in the final quarter of 2008 and by 1.21% and 0.21% in the first and second quarters of 2009, respectively. The CB did not change its methodology in calculating these figures. According to CB officials, it will start applying a new methodology with full year 2009 figures, due out by the end of March (ref A). ¶3. (SBU) While few private analysts appear to be publicly questioning the accuracy of the CB's QIII GDP report, the third quarter recovery does seem inconsistent with the rise in the unemployment rate from 8.3% in the second quarter to 9.1% in the third quarter of 2009. A number of local analysts point out that given the growth rates registered in the first three quarters of 2009, the Ecuadorian economy would have to grow considerably in the last quarter to achieve the CB's estimate of a GDP growth of 1% in ¶2009. Most local analysts expect Ecuador's economy contracted for full-year 2009, as also expected by the IMF (-1%) and CEPAL (-0.4%). ¶4. (SBU) Ten of fourteen economic sectors recorded growth between the second and third quarters of 2009: construction (2.11%); financial intermediation (1.11%); private households (1.02%); commerce (0.75%); fisheries (0.53%); services (0.39%); water and electricity (0.37%); transport (0.20%); public administration (0.14%); and other GDP elements (0.75%). Four sectors reported quarterly contractions: agriculture (-0.94%); oil refining (-0.71%); manufacturing (-0.32%); and mining (-0.29%). The third quarter contraction in the oil sector reflects a fall in oil production since international oil prices recovered during that period. On a year-over-year basis, eight economic sectors contracted, including: commerce (-4.62%); manufacturing (-2.76%); agriculture (-2.51%); and mining (-1.35%). The following sectors grew on a year-over-year basis: water and electricity (5.49%); construction (4.51%); public administration (3.27%); and transport (1.95%). The CB also reported that internal demand in the third quarter grew by 1.04% on a quarter-to-quarter basis, after registering three consecutive quarters of contraction, with investment increasing by 1%, household consumption by 0.48%, and government expenditures by 0.14%. ¶5. (SBU) On the external side of the economy, the CB also reported this week that Ecuador registered a trade deficit of $332 million for the full year 2009. 2009 exports declined 26% and imports fell 20%. The decline in imports was mainly due to the fall in internal demand that accompanied the QIV 2008 to QII 2009 recession and the balance of payments import restrictions the GoE imposed in January 2009. Exports decreased in value mostly as a result of reduced international oil prices (from an average of $83 in 2008 to an average of $56 in 2009) and a contraction of 6.1% in the volume of oil exports. -------------- -------------- -------------- GoE Plan to Use Reserves to Stimulate Construction Sector Falters -------------- -------------- -------------- ¶6. (SBU) On October 20, 2009, President Correa announced the government's intention to repatriate up to $2.5 billion in international reserves to provide financing to productive sectors in Ecuador, with the broad goals of stimulating Ecuador's economy and reducing unemployment levels (refs B, C). The GoE announced at the time that it would begin by allocating roughly $600 million of the repatriated reserves to support the construction sector. Delays in the repatriation of the international reserves and discrepancies about the risk of the investments in public banks led President Correa to criticize Central Bank (CB) management, prompting the mass resignation of CB staff in December 2009. [Note: the repatriation of reserves is so far more rhetoric than reality, as all it entailed initially was altering the accounting of funds on the CB's balance sheet: shifting funds from the CB's account with the Bank for International Settlements (BIS) to the public banks' accounts with the CB. These resources remain deposited in overseas accounts, mainly with the BIS, until the public banks draw down on their CB accounts.] ¶7. (SBU) On December 12, 2009, interim CB President Diego Borja announced the immediate repatriation of international reserves totaling $864 million, with $400 million directed to Banco de la Vivienda, and Banco del Pacifico for financing home mortgages and about $200 million to the Ministry of Urban Development to finance a $5,000 subsidy for purchases of homes valued at less than $60,000. Separately, the Ecuadorian Social Security Institute (IESS) agreed to provide an additional $200 million in financing of home mortgages. ¶8. (SBU) As President Correa has commented a number of times in recent public speeches, only a fraction of the promised resources have reached the intended destination. Analysts believe the stimulus' impact has been weakened by bureaucracy and economic uncertainty, while GoE officials claim there are not many housing programs ready to receive financing. Meanwhile, the public banks have invested some of these resources in private financial banks, which have increased their deposits as a result of the stimulus plan. Also slowing new construction is the Ministry of Urban Development's approval process that can take months to complete. Lenders also claim that, although they are ready to create loans, many builders do not provide the necessary documentation, or have unrealistic income expectations. Banco del Pacifico was allocated $200 million to increase lending to home buyers and builders, but so far has only granted credits for $25 million. The Ecuadorian Social Security Institute (IESS) has only approved 1 of 32 loan requests. Even without these delays, potential homebuyers remain reluctant to take on the substantial debt a home purchase would represent. E -------------- -------------- -------------- Consumer Credit Card Debt Increases during Economic Downturn -------------- -------------- -------------- ¶9. (SBU) The growth in credit card debt in Ecuador slowed in 2009 to 8.6%, down from an average annual growth rate of 20% from 2000 to 2008. In 2009, credit card debt increased to $2.57 billion. Of the nearly 14 million people in Ecuador, 2.9 million have a credit card, placing the average credit debt among credit card holders at about $900 compared to $8500 in the US. Although credit purchases for consumer goods such as appliances, computers, clothing, toys, and jewelry decreased last year, credit purchases for basic products and services at grocery stores and fast food restaurants increased. The recent economic downturn also pushed delinquency rates on credit cards from 3.8% in 2008 to 5.1% by the end of 2009 (compare to 4.5% in the United States at end of 2009). -------------- -------------- Fuel Smuggling Across Ecuador's Borders -------------- -------------- ¶10. (SBU) Subsidized fuel in Ecuador has attracted the attention of opportunists along both its northern border with Colombia and southern border with Peru, due to the wide disparity in pump prices between Ecuador and its neighbors. While gasoline and diesel in Ecuador sell on average for about $2.50 and $2.00 a gallon, respectively, Colombians are paying in the range of $3.40/gallon for gasoline and $2.90/gallon for diesel. Peruvians living in Lima pay even higher prices, with gasoline roughly in the $3.60 to $5.00 range (depending on octane level). The gap has fomented a sizable black market for Ecuadorian fuel between the Ecuadorian border city of Tulcan, and the Colombian city of Ipiales, and the southern border with Peru is reportedly wide-open (at least on the Ecuadorian side),with few obstacles to smuggling of fuels or any other products. Media reports about activities on the Colombian border allege that smugglers are using modified vehicles to transport gasoline, diesel, and propane. Also according to press reports, the provincial government of Carchi, where Tulc????n is located, has initiated a program to reduce the size of the black market, now estimated to employ some 3,000 people. HODGES