US embassy cable - 05QUITO945

C O N F I D E N T I A L SECTION 01 OF 02 QUITO 000945 
 
SIPDIS 
 
DEPT FOR WHA/AND 
PLEASE PASS TO USTR 
 
E.O. 12958: DECL: 04/27/2015 
TAGS: PGOV, ECON, EFIN, EC 
SUBJECT: FINANCIAL INSTITUTIONS NERVOUS ABOUT ECUADOR'S 
FISCAL POLICY 
 
REF: QUITO 900 
 
Classified By: Amb. Kristie A. Kenney for reasons 1.4 (b) and (d). 
 
1. (C) Summary. Our meetings with the financial and business 
sectors reveal uneasiness with the fiscal policies being 
espoused by the new Minister of Finance, Rafael Correa 
(Reftel).  The international financial institutions (IFIs) 
found Correa,s proposed economic remedies to be nave and 
outdated.  Citigroup Ecuador President noted that the Finance 
Minister,s initial statements had hurt Ecuador's risk 
ratings, but no capital flight had yet occurred.  The local 
American Chamber of Commerce is troubled about the GOE,s new 
tone toward U.S. investors.  All are taking a proactive 
approach to the new administration, reaching out to key GOE 
officials to promote dialogue.  We are continuing to do the 
same.  End Summary. 
 
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Financial Sector "Iffy" on Fiscal Policies 
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2. (C) The Ambassador met with the leading international 
financial institutions (World Bank, Inter-American 
Development Bank, International Monetary Fund) and Citigroup 
Ecuador President on April 26 to discuss the rhetoric and 
proposed fiscal policies of the new Minister of Finance, 
Rafael Correa.  The IFIs had met with Correa earlier that day 
and expressed genuine concern about his approach.  Correa 
grudgingly acknowledged the error of his initial rash and 
hasty commentary, but nonetheless railed against the 
Gutierrez government's fiscal policies, citing an increase in 
unemployment from 8% to 12% and persistent poverty.  He 
advocated a more "activist" fiscal policy to stimulate and 
protect job growth, by raising import duties and expanding 
public bank loans.  He told the IFIs that the GOE would pay 
its international debts if it "has the liquidity". 
 
3. (C) The IFIs heard Correa out, then gently pointed out 
that Ecuador's historically low inflation is good for all 
sectors of the economy, that export-led growth had been 
proven more effective than protectionism, and that fiscal 
discipline was necessary to attract investment.  The World 
Bank was particularly cautious because of its pending USD 100 
million disbursement to Ecuador to promote fiscal 
consolidation and competitiveness.  The World Bank is coming 
under increasing pressure to review and reconsider this 
disbursement aimed at rewarding past government fiscal 
behavior and, more importantly, to encourage and promote 
future discipline he told the Ambassador.  Correa, who seems 
to have abandoned the possibility of changing the currency, 
did not raise the issue of dollarization. 
 
4. (C) The Citigroup President, also concerned, highlighted 
some calming factors.  First, there has not been a run on the 
banks.  He confessed that investors are nervous, but no one 
is pulling out yet, mainly because of dollarization.  He also 
commented that the GOE is financially in good shape.  It has 
nine to ten months of cash reserves and is not facing tough 
imminent spending choices - thanks to high oil prices. 
 
5. (C) The Ambassador held a separate meeting with the 
American Chamber of Commerce Steering Committee about what 
they perceive as the government's anti-U.S. sentiment.  The 
Ambassador calmed these fears, noting that, during the entire 
political drama, there were no anti-Amcit or U.S. business 
security incidents.  She felt, and AmCham members agreed, 
that commercial disputes would be set back, as we have lost 
our GOE interlocutors, those that were intimately familiar 
with the disputes and moving on them.  The reality, she 
noted, is that we are starting over with this government and 
all must begin to engage and educate the new players. 
 
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Positive, Proactive, Pragmatic 
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6. (C) The financial players all agreed that the three "P"s 
should govern their approach to the new administration.  By 
engaging relevant Ministers early and often and promoting 
productive and informative dialogue in a spirit of 
cooperation, they stand a better chance of tempering bad 
policy and avoiding rash decisions.  The Merck Pharmaceutical 
representative had concerns about President Palacio,s 
predilection for socialized medicine, but he said that Merck 
already knows President Palacio (a cardiologist) and the 
Minister of Health well and will engage them to help inform 
them about the pitfalls of this approach. 
 
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Comment 
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7. (C) The fact of the matter is that we and the IFIs must 
deal with the new administration, if only to alert its 
members to the risks of ill-considered policy options.  We 
have advised the IFIs and the private sector to be as 
proactive as they can and to keep us abreast of progress or 
shortcomings.  We will continue to follow commercial disputes 
closely.  Although President Palacio struck a balanced tone 
in his meeting with the Ambassador on bilateral issues, 
others in his administration might not have found the 
religion yet.  We will do our best to convert them. 
 
KENNEY