AMBASSADOR'S CALL ON NEW MINISTER OF FINANCE

C O N F I D E N T I A L SECTION 01 OF 02 GUATEMALA 000244 SIPDIS TREASURY FOR OASIA: CHRIS KUSHLIS AND BILL BLOCK E.O. 12958: DECL: 02/02/2009 TAGS: EFIN PGOV ECON PINR GT SUBJECT: AMBASSADOR'S CALL ON NEW MINISTER OF FINANCE BONILLA: GETTING A HANDLE ON WHAT SHE HAS INHERITED Classified By: EconCouns Steven S. Olson for reason 1.5 (d) Summary -------------- ¶1. (C) Ambassador called on new Minister of Finance Maria Anonieta de Bonilla on January 22. Bonilla is a former banker and executive director at the IMF and IDB and is close to economic cabinet coordinator Richard Aitkenhead and new tax and customs chief Willy Zapata (septel). Her immediate concern is getting a better understanding of the budget and past spending levels. The Congress has frozen spending at 2003 levels, the courts have suspended about 10% of her tax base, and she has inherited unfunded obligations from the previous government. She nevertheless hopes to be able to keep the deficit near 2% of GDP. She wants to renew the IMF Stand-by when it expires, but it isn't an especially pressing concern. She wants to be off the FATF NCCT blacklist to save interest costs when Guatemala goes back to the market to borrow. ¶2. (U) Ambassador and EconCouns paid a courtesy call on new Finance Minister Maria Antonieta ("Toni") de Bonilla on January 22. Getting a Handle on Spending -------------- ¶3. (C) Bonilla said that she was still trying to get a grasp of the state of the nation's finances. Her first concern was obtaining detailed information on the previous year's spending. The Congress had not approved a budget for CY 2004 budget, leaving her with the equivalent of a continuing resolution at 2003 levels, while the opposition FRG and UNE parties had banded together at the beginning of the year to prohibit transfers among accounts (a practice the Portillo government used extensively and that rendered its congressionally-approved budgets meaningless). Meanwhile, the Constitutional Court had definitively suspended the (unpopular) IEMA assets-based alternative minimum tax on businesses, and the former government had made binding commitments to new spending not contemplated in the 2003 budget levels she was forced to work with. Her initial calculations suggested a Q.2.5-3.0 billion loss in revenues from the IEMA (roughly 10% of the budget),an Q.800 (US$100) million additional obligation for compensation to former civilian militias (ex-PACs),and additional obligations for severance benefits to downsize the military, all on top of non-discretional spending that that consumed over 70% of the budget. Deficit Will Grow; New Stand-by Desired but Not Urgent -------------- -------------- ¶4. (C) Bonilla said it was inevitable that the 2004 deficit would be higher than the approximate 1.5% of GDP achieved in ¶2003. She assumed she would find as yet undiscovered obligations inherited from the last government on top of the ones she already knew about and the IEMA problem. Without action, she could see the deficit quickly approaching 5% of GDP. She would be looking to achieve 2%, principally through austerity measures and cutting waste. She said that President Berger had given her 72 hours inform the cabinet how much needed to be cut and where. ¶5. (C) Asked, she said she had not had any detailed conversations with the IMF and wasn't ready to start discussing a renewal of the stand-by agreement. She said that she would want an SBA eventually, but there was no great urgency. Perhaps a Fund monitoring agreement could be put in place if there were a gap between one SBA and the next. Her greatest priority was to find areas in the budget where wasteful spending could be cut to permit investment in the high-impact social programs the Berger campaign had promised. Interest Rates, Deficit Financing, and the FATF -------------- -- ¶6. (C) Bonilla said that significant new bond financing was inevitable to cover the continuing deficit and roll over maturing debt. She believed some savings on interest rate costs were possible, particularly if Guatemala could get off the Financial Action Task Force's blacklist of Non-Cooperating Countries and Territories. Ambassador explained that we had tried to encourage others to join a technical review before the FATF February plenary and that there was a growing consensus that Guatemala was about ready to be removed from the list. However, travel schedules of review team members were already fully booked. Bonilla said she had heard the same thing. She hoped that Guatemala could get off the list and go to financial markets before the apparent U.S. recovery started driving interest rates back up. Improving Tax Collection; Abadio On His Way Out -------------- -- ¶7. (C) EconCouns asked what the prospects were for improving revenue collection by attacking contraband and corruption in customs and thereby broadening the tax base. Would there be changes in the customs and taxation authority (SAT),and if so, were there any names being circulated? Bonilla said that President Berger had made clear that he wanted the head of the SAT, Marco Julio Abadio, out as quickly as possible. She said she did not know of any names being mentioned as possible replacements. (Note: Abadio resigned the next day in lieu of being fired. Respected former Central Banker Willy Zapata was sworn in to replace him on January 27. Zapata had thought he was moving to the Superintendence of Banks (septel).) Bonilla said that she assumed that significantly more taxes could be collected with better administration of the SAT and a crackdown on corruption and contraband, but she did not yet have an estimate of how much additional revenue could be raised with current tax rates. She had not spoken to Abadio (and evidently had no wish to do so). Comment and Bio Notes -------------- ¶8. (C) Bonilla is friendly, U.S. trained, competent, respected, and experienced. She has served Guatemala as Vice President of the Central Bank, Executive Director at the IDB and then IMF, was general manager of a small bank (Banco Quetzal),and was one of the banking sector's representatives on the Monetary Board, which sets the country's monetary policy and is the board of directors for the central bank. She is also very much the cautious technocrat, unwilling to stray far in her comments from the hard data she has in hand. She is close to the presidential coordinator for economic policy, former finance minister Richard Aitkenhead, and to new SAT Superintendent Willy Zapata. Zapata and Bonilla were classmates at the University of Illinois (where Bonilla received her MSc in Economics in 1989),and Zapata and Aitkenhead were schoolmates in Guatemala. It is a strong and unified team. We sense that Bonilla will focus on being the accountant and controller with perhaps less of a policy role than her predecessor, Eduardo Weymann. That would not be a bad thing. The new government has a lot of talent and experience within its ranks to draw upon, and Guatemala could certainly use some concentrated attention on minding the books and financial controls after the excesses of the Portillo administration. HAMILTON