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Thursday, December 25, 2008

Ecuador to reduce spending as oil prices plummet

QUITO, Dec 23 (Reuters) - Ecuador will reduce public spending and delay some infrastructure projects to cope with low oil prices that will likely stay down during the first part of 2009, Finance Minister Elsa Viteri said on Tuesday.

Crashing oil prices have severely crimped the OPEC nation's revenue intake, which for two years have helped leftist President Rafael Correa increase spending on the poor majority and boost his approval ratings.

"We have to start rationalizing spending and prioritizing," Viteri told a local radio station, adding that costly subsidies for fuel and gas will also be rationalized. "In terms of oil prices, the first quarter will be very hard on us."

The value of Ecuador's oil mix has dropped more than 70 percent in six months to trade at around $20 per barrel. Oil revenues finance nearly 60 percent of the country's budget.

In one of the first clear signs of spending cuts, officials said the government will halt further purchasing of new military weaponry and revise pensions of senior officers.

Powerful business groups have urged the government to make steep spending cuts to counter a global economy slowdown that has hurt exports of key products like flowers and bananas.

The government has invested nearly $4 billion in 2008, Viteri said, or around $10 million per day.

Economists say lower oil revenues and limited access to credit lines after Correa defaulted on $3.8 billion in sovereign bonds could push him to abandon the U.S. dollar as its currency to better deal with a feeble economy.

Correa, who has been critical of the dollar, has denied plans to scrap the greenback, which was adopted in 2000 after a crippling financial crisis and is widely popular among Ecuadoreans who see it as an anchor of stability.

Correa, a former economy minister, could see his popularity crumble if the economy worsens before his April reelection, local analysts say.

However, Viteri said the government planned to counter the spreading global crisis by extending restrictions on some imports and exploring new markets for its exports.

"There will have to be restrictions on some imports," Viteri said, without saying which products or from which country. "We have to diversify the markets for our imports."

The government will issue $1.5 billion in domestic bonds to finance investment next year, according to a statement by the company's regulator that registered the future issue in the local stock market. The terms of the paper were not released, but the Social Security Institute has said it could buy around $1.3 billion of those bonds.

Viteri added the country is seeking financing from friendly nations like Russia and Iran, and regional lenders like the Inter-America Development Bank. Some analysts warned the IADB will shut down credit to Ecuador after the default, but Viteri said the bank recently disbursed loans previously approved as a sign of good relations.

She said the government plans to offer bond-holders a restructuring plan early next year.

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