POST'S VIEWS ON OPIC CAFTA-DR FUND

UNCLAS SAN SALVADOR 000983 SIPDIS STATE PASS OPIC - JDOHERTY AND JHANSLEY USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR E.O. 12958: N/A TAGS: EINV OTRA ES OPIC SUBJECT: POST'S VIEWS ON OPIC CAFTA-DR FUND REF: STATE 57353 ¶1. Post understands that OPIC is planning to support a Central America and Caribbean Fund that may invest in the financial services sector, to include banks and nonbank financial intermediaries and specialized financial services firms in OPIC-eligible countries in Central America and the Caribbean. Post believes that this initiative, if focused on nonbank financial intermediaries, would help develop capital markets in El Salvador to support investment in productive enterprises or other essential needs such as housing and infrastructure. ¶2. Banks in El Salvador have access to a variety of financing options. Local banks borrow easily and relatively cheaply on international markets. The country's split investment-grade rating for sovereign risk keeps interest rates low for the banks, and dollarization eliminates any exchange rate risk. ¶3. While banks have no problem getting financing of their own, they do have a poor record getting financing to small businesses that have the potential to spark economic growth and job creation. Interest rates for such lending range from 12 to 25 percent, despite bank's published rates of 8 percent (available to very few). High collateral requirements further limit small businesses' access to credit offered by traditional banks. With the exception of one bank that was founded as a microcredit organization, banks require guarantees such as mortgages and audited financial statements that small businesses seldom have. ¶4. Post suggests that focusing on nonbank financial intermediaries, instead of the traditional banking sector, would be more supportive of OPIC's economic development mission. In El Salvador, there are four microfinance institutions with loan portfolios of at least $10 million; throughout Central America, there are at least nine. There are also a number of cooperatives throughout the region with active loan portfolios. Further lending by these institutions is in many cases constrained by difficulty in accessing capital. One local investment advisor recently suggested that microfinance has large potential for growth, but could benefit from the capital infusion and management support that venture capital would bring. ¶5. Investing in other financial services in El Salvador would be problematic at this time, given the lack of legal and regulatory framework for financial vehicles taken for granted elsewhere, such as mutual funds, venture capital, securitization, and factoring. Meanwhile, social and economic factors limit the development of the stock market-- aside from a handful of stocks traded after privatizing telecommunications, electricity, and pensions, only short- term securities and government bonds are traded. Pension- fund management, meanwhile, might represent a good business opportunity, but there is certainly no lack of capital in the sector, as both funds in El Salvador are managed by well- capitalized local banks, one with World Bank support. ¶6. There is a clear need for capital market development in El Salvador to spur investment, but Post does not believe providing the traditional banking sector additional funding will support that goal. Instead, investment in nonbank financial intermediaries--but perhaps on a scale smaller than the $5 - $15 million proposed--would be more supportive of El Salvador's development. Should the legal framework be established, Post also believes support for local venture capital would be helpful. ¶7. Post is not aware of any derogatory information regarding Derby Overseas Investment.