MESSAGE FROM AMBASSADOR BARCLAY TO SECRETARY

UNCLAS SECTION 01 OF 03 SAN SALVADOR 002818

SIPDIS

SENSITIVE

STATE PASS TO OPIC/USTDA/EXIM/SBA/IADB
USDOC FOR SECRETARY GUTIERREZ
USDOC FOR 7000/ITA/USFCS/DG/HERNANDEZ
USDOC FOR 4332/ITA/MAC/WH/BASTIAN
USDOC FOR 3134/ITA/USFCS/OIO/WH/MKESHISHIAN

E.O. 12958: N/A
TAGS: EINV ETRD PREL OVIP ES
SUBJECT: MESSAGE FROM AMBASSADOR BARCLAY TO SECRETARY
GUTIERREZ

REF: SAN SALVADOR 2787


1. (U) I am looking forward to your visit to El Salvador.
Your pivotal role in securing U.S. Congressional approval of
CAFTA-DR gives your visit a special significance; the Embassy
and the Government of El Salvador also recognize that your
making Central America the destination of your first overseas
trade mission shows your interest in a strong U.S.
relationship with the region. During your visit, we will
celebrate our accomplishment in approving CAFTA-DR and
explore its business potential. However, it will be
important also to focus on commitments to specific actions
that will help lift El Salvador out of prolonged slow growth
that adversely affects the people of El Salvador and
potentially puts U.S. interests at risk. The devastating
events of early October only further underscore the
vulnerability of the countries of the region and the need to
ensure a strong economic foundation.


2. (SBU) You will find a willing and, I believe, capable
partner in President Tony Saca. President Saca understands
the political importance of showing results from CAFTA-DR, on
which he has staked his credibility, and the private
sector-led, market oriented set of policies which ARENA
governments have pursued since 1989. Saca can make changes,
even difficult changes, when necessary; you can help by
delivering a message on what some of these changes are and by
taking back to Washington ideas on how we can be helpful. If
successful at home, Saca also has the potential to be a
strong leader in the region. A successful visit next week
will give President Saca the support he needs to advance our
common agenda in Central America.


3. (U) I have been impressed during my 22 months in El
Salvador at the progress it has achieved and at its
extraordinary potential for success. You will see much of
this when you are here, including good infrastructure and
signs of economic activity from the street level to
first-class shopping malls. However, El Salvador is also a
country that badly needs more and better distributed economic
opportunities. Although it has followed determined reforms,
El Salvador is plagued with one of the lowest rates of
economic growth in Latin America and, in 2004, delivered no
gains in per capita income growth. Despite improvements in
the quality of life (many intangible),new opportunities for
good jobs are scarce for the bulk of the population; many
feel menaced by rising crime and a sense of declining
purchasing power. The cruel reality is that only by leaving
El Salvador ) usually to the United States ) do many people
hope to improve their situation. In turn, El Salvador has
become highly dependent on the flow of money that migrants
send back to maintain their families, an insecure economic
strategy.


4. (SBU) The United States must recognize the importance of
this moment. Specific Salvadoran actions to foment
conditions for growth and job creation will pay for
themselves many times over in foregone economic, political
and social costs by preventing a destabilizing economic
crisis, more massive emigration to the United States, an
increase in local and transnational crime, and possibly the
emergence of an unfriendly government. To realize the
potential of this economy, El Salvador urgently needs new
investment for enterprise development and job creation. We
need to ask ourselves, what are we doing, and what more can
we do? Following are key actions in the Embassy,s scope.

a. Effective implementation of CAFTA. The Salvadoran
Government appears to be doing what is necessary to have
CAFTA systems in place when the agreement enters into force.
We should press El Salvador to lead the region in
implementation as they did in negotiating the agreement, and
resist the temptation to water down CAFTA-DR,s market
opening and institutional strengthening ambitions through
weak implementing rules.

b. Legislative approval of a Government Ethics Law. The bill,
drawn up with assistance from USAID several years ago, is an
important opportunity for the government to build credibility
with the public, improve government services, promote
transparency and root out petty corruption which acts as a
drag on the economy.

c. Salvadoran approval of an updated OPIC bilateral
agreement. A modern bilateral will facilitate provision of
OPIC services, in particular new services for small business,
which would benefit U.S. investors looking for partners and
opportunities here. I hope that we will be able to announce
progress on this during your visit next week.

d. Effective judicial reform to put an end to slow,
unpredictable processes and decisions that affect business,
law enforcement and other decisions. El Salvador needs
judicial institutions that are effective in resolving
business disputes while discouraging inappropriate use of the
courts to seek commercial advantage. There are several cases
pending involving U.S. companies.
e. Clearer, more consistent rules for and regulatory
processes are needed. We would like the electricity and
telecommunications regulator, SIGET, to move forward on
implementing a public consultation process announced a year
ago for new rules and expand the principle of consultation to
regulatory reforms. An inadequate consultation process has
particularly burdened U.S. companies in the electricity
sector, who are operating under a series of non-transparent
regulatory decisions driven by a political objective of
mitigating tariff changes on consumers rather than market
efficiencies.


5. (U) There are things that the United States can do, and I
urge you to make leaders of Ex-Im, OPIC, SBA and TDA widely
available to look for partnerships and projects with a strong
growth component. Our agencies should consider how they can
help open up access to investment capital and financial
resources, support infrastructural development, provide
technical assistance for businesses, promote technology
adoption, and reduce production and transaction costs?


6. (U) Growing companies, and especially small companies,
require capital, but the Salvadoran banking system is not
meeting their needs. During their meeting with the banking
association, the interagency delegation should talk about how
to develop mechanisms for risk capital, for example by
expanding the rights of minority shareholders, the value of
using the local equity market to raise capital; what might
the USG do to foster guarantee programs to support credit,
particularly small business? USAID, for example, has
initiated a guarantee program and we would be interested in
learning if there are other options available. They should
use the meeting with the MultiSectoral Bank (BMI) or seek out
other discussions to learn about El Salvador,s plan to
develop its service industries, including logistical services
and tourism. El Salvador would like to leverage its
infrastructure and location to promote shipping and other
trade related logistics services. This plan involves
enhancing the country,s two ports, concessioning airport
services, rebuilding the railroad and improving Customs
administration, all activities which Ex-Im, TDA and OPIC can
support. TDA,s grant for an electronic trade portal, which
will be announced during your visit, is a very positive
development in this area.

7. (U) Other targets of opportunity are plans by U.S.
investors and the government-owend hydropower firm CEL to
construct new power plants in country, emerging GOES interest
in biofuels, and interest in natural resource exploitation.
Large projects like these may exceed the government,s
environmental, resource management, tendering and other
abilities; assistance from the USG can help both U.S.
businesses and ensure the best possible outcome for El
Salvador.


8. (U) In the longer term, continued public support here for
CAFTA-DR, and effective use of the market signals that
CAFTA-DR will facilitate, requires helping sectors that are
disadvantaged transition to new activities. The
Administration,s commitment to seek funding until 2009 to
support this transition in the rural sector is important.
USAID and USDA are already working to support diversification
into non-traditional, value added products, and quality
coffee, but we will need to continue strong support in this
area. Agricultural sector growth is currently a bright spot
in part because of recent government programs to help farmers
with traditional crops, but we need to support the
agricultural conversion process.


9. (SBU) Lastly, the many Salvadoran companies with export
potential will continue to seek opportunities in the U.S.
market, and we are seeing more interest in expansion into
services markets. We will look for Administration leadership
in holding open and, as possible, expanding opportunities in
the services and government procurement areas following the
provisions of CAFTA-DR. U.S. support for the economic
development of El Salvador will be in the best interest of
the United States. U.S. participation now in the economic
development of El Salvador will benefit the United States in
the future, and costs borne now will help to forestall
possible higher costs in the future.
Barclay