FORMER BANKING ASSOCIATION DIRECTOR FORECASTS DIFFICULT

UNCLAS SECTION 01 OF 02 SAN SALVADOR 001265 STATE PASS USAID/LAC STATE ALSO PASS USTR USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EFIN ECON ETRD EINV ES SUBJECT: FORMER BANKING ASSOCIATION DIRECTOR FORECASTS DIFFICULT ECONOMIC TIMES IN 2009-2010 REF: SAN SALVADOR 1238 ¶1. (SBU) SUMMARY. Former banking association director Claudio De Rosa expressed confidence in the banking sector but forecasted a long and difficult two years ahead for the Salvadorian economy. He encouraged the government and Central Bank to seek contingency credit from the International Monetary Fund (IMF),so that the Central Bank could act as lender of last resort. He also advocated seeking $1 to 2 billion in new international loans for counter-cyclical operations (e.g., infrastructure projects) during a probable recession. While either victor of the March 2009 Presidential elections would have a difficult term, de Rosa thought the situation would be worse under the (left-wing) FMLN because it lacked experience in government. De Rosa was not, however, concerned about the current government's short-term liquidity problems (reftel),putting him among the minority of Posts's economic contacts. END SUMMARY. ¶2. (U) On November 5, Econoff met with Claudio de Rosa, former director of ABANSA, the Salvadoran banking association (1997-2006), and former El Salvador desk officer at the International Monetary Fund (IMF). De Rosa now writes a financial column in the local press and has started an Internet-based magazine. ¶3. (SBU) According to de Rosa, the banking sector was well positioned to confront the international financial crisis. De Rosa's one concern was the Central Bank's inability to act as a lender of last resort and inject more liquidity into the system. He said that he'd been encouraging Technical Secretary to the President Eduardo Ayala and Central Bank President Luz Maria de Portillo to seek contingency lines of credit from the IMF, which would not require legislative approval. Ayala was reluctant to talk to the IMF, de Rosa said, because the GOES was worried about conditionality. As a former IMF staffer, de Rosa had advised Ayala that the GOES could likely negotiate two tranches of credit (up to $300 million) with little to no conditionality. (NOTE: Press reports on November 6 confirmed that the GOES is seeking credit from the IMF. END NOTE.) De Rosa said that it would be "extremely difficult" for the GOES to redirect the IMF money to cover their short-term fiscal problems, though it was not technically impossible. ¶4. (SBU) El Salvador will face difficult economic times over at least the next two years, however, and de Rosa forecasted the economy would likely move into recession through at least 2010. He expressed particular concern over exports. Through August 2008, export numbers have continued to be a "bright spot" in the economy. De Rosa feared, however, that maquila exports, which account for roughly forty-five percent of total exports and three-quarters of exports to the United States, were based on orders placed before the international financial crisis, and new orders would either be cancelled or significantly reduced. ¶5. (SBU) De Rosa projected that "things will be very bad" if (center-right, pro-U.S.) ARENA candidate Rodrigo Avila wins the March 2009 Presidential election, and "even worse" if (left-wing) FMLN candidate Mauricio Funes wins. With the Government of El Salvador (GOES) essentially out of money, de Rosa said that the only way forward he saw was $1 to $2 billion in new loans from an international financial institution that could be used for infrastructure projects and other counter-cyclical fiscal policy projects. An ARENA government would have the experience in government to get money dispersed and projects going in a matter of months. Under an FMLN government, officials would still be learning about procurement, disbursement, etc.; thus, new projects would probably take a year or more to get started. ¶6. (SBU) De Rosa also stated that the private sector would be "more willing to pitch in and help" an Avila government, while they would "wait and see" what a Funes government would do. A long-time advisor to ARENA, de Rosa commented that "some of the right wing" of the party were actually hoping for a Funes victory. With the fiscal and economic situation he would inherit, Funes's government would have a high chance of failure, which would "lead to 25 more years of ARENA" in power. Nevertheless, de Rosa thought that, as long as an FMLN government followed moderate economic policies, ARENA would support new loans in the National Assembly to "do what's right for the country." ¶7. (SBU) Asked about the GOES's short-term fiscal and liquidity problems (reftel),de Rosa replied that he was not concerned. The government has found itself in financial trouble before and always found a way out. The current government, he said, "is like a man who cheats on his wife all the time. He knows how to get out of it SAN SALVAD 00001265 002 OF 002 when he gets caught." (COMMENT: Subsidies will cost the GOES about $800 million in 2008. President Saca has added new subsidies for bus transport companies and refused to eliminate other subsidies, including for residential electricity users. END COMMENT.) ¶8. (SBU) COMMENT: De Rosa's optimism about the GOES's short-term fiscal outlook puts him among the minority of Post's financial/economic contacts. While the government may have found ways out of financial predicaments before, this time the situation is worse. The banks have already said they want to cash out rather than roll over their short-term government debt, the pension funds appear to be tapped out, and the international debt market has its own problems. END COMMENT. BLAU