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.