ES INVESTMENT CLIMATE: SLIP SLIDING AWAY?

UNCLAS SAN SALVADOR 000080 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENRG EFIN ECON EINV SUBJECT: ES INVESTMENT CLIMATE: SLIP SLIDING AWAY? REF: A. 2007 SAN SALVADOR 2383 ¶B. SAN SALVADOR 33 ¶1. (SBU) Summary. In a January 23 meeting with Presidencia Secretario Tecnico (President Saca,s Chief of Staff) Eduardo SIPDIS Ayala Grimaldi, the Ambassador warned the Saca Administration that its recent actions to curry popular approval were hurting its investment climate. Saca,s promise that electricity prices would be frozen through the end of his term in June 2009 and Administration efforts to control loan and credit card interest rates, while possibly helpful in the short run, could end up doing more harm than good. Ayala claimed that recent GOES actions to reduce electricity distribution tariffs were based on technical, not political, grounds. However, he agreed to work with electric distributors to find a suitable compromise. However, no progress has been made since the meeting. Financial System Superintendent Montenegro assured the Ambassador that an accord with the banking sector would avoid having the GOES set loan and credit card interest rate caps by decree. End Summary. Electricity Rate Setting ) Not Political? -------------- ¶2. (SBU) Repeatedly over the last year plus, President Saca has stated that electricity prices would not increase, despite the fact that El Salvador is dependent upon thermal fuel generation for more than half of its electricity needs. During the December announcement of his Family Alliance Plan (Alianza por la Familia) (reftel A),President Saca said electricity prices would be frozen for the remainder of his term in office, which ends in June 2009. Electricity distribution rates were under review to set rates for the five-year period of 2008-2012 (reftel B). Secretario Tecnico Ayala said that GOES electricity and telecommunications regulator SIGET hired a consultant and that they had been in discussions with the electricity companies for many months to reach an accord on the new rates. He said that in the end, SIGET and the companies could not reach an agreement, but the decision to go forward with the reduction was based on technical grounds. ¶3. (SBU) The Ambassador said he understood that consultants might have differing opinions; however, the electricity companies felt strongly enough about the apparent problems with the process to file law suits with the Salvadoran Courts to challenge the process. He added that, as an investment banker, he was looking at the situation from a broader perspective. The Ambassador showed Ayala an article where Fitch Ratings had placed U.S.-based electricity distributor AES on &Rating Watch Negative8 because of SIGET,s recent tariff rate reductions. He pointed to the section of the article that noted the &company,s exposure to increasing regulatory risk and its vulnerability to social and political interference.8 ¶4. (SBU) The Ambassador emphasized that this was not about a battle of consultants, but the unbiased observations of investment analysts. He said that investors, both domestic and foreign, look at those reports when considering whether to invest in El Salvador. The country had a well-earned reputation as a place to invest in Central America and it would be a shame to sacrifice it in the hope of garnering a few more votes. Besides, he added, good policy is good politics. The Economic Counselor added that the vast majority of the people would only see a 21 cent per month decrease in their electric bills as a result of the distribution tariff rate reduction. The Ambassador noted that reduced revenues could affect electricity company investment in the sector, which could eventually lead to electricity shortages just before next year,s elections. In addition, interference in the regulatory system would not help El Salvador meet the government and regulatory performance indicators used by the Millennium Challenge Corporation (MCC). ¶5. (SBU) Ayala said that the GOES would work with the electricity companies to resolve the impasse, even though the rates had been published. He said that SIGET officials would meet with AES right away to try to reach an accord. He also knew that AES had been making the rounds in Washington to present its side of the case. Ayala assured the Ambassador that the GOES did not want to interfere with free market principles, but it also wanted to protect the consumer. The Ambassador responded that he would be willing to discuss the issue with President Saca, if necessary. ¶6. (SBU) AES Country Manager Fernando Pujals and Regional VP Julian Nebreda met with SIGET Superintendent Fernando Arguello on January 24. Pujals told Econ Counselor on January 28 that the meeting had been &very disappointing8 and Arguello said he could do nothing unless he received instructions from President Saca. AES officials had been unsuccessful in meeting with Ayala, who was involved in the meeting of MCC CEO Danilovich on January 24-25. Pujals was going to try and see him on January 28, before Pujals left for meetings at AES headquarters. Banking Sector Also Feels the Heat -------------- ¶7. (SBU) Post has had numerous conversations with the banking sector about the latter,s concerns with Saca,s Alianza por la Familia announcements to cap interest rates on loans and credit cards. Aware of those concerns, Ayala said he asked Financial System Superintendent Luis Armando Montenegro to attend the meeting with the Ambassador. Montenegro explained the recent meetings with the private banking association (ABANSA). He noted two of the more egregious problems in the sector, such as one institution charging 70% in credit card interest rates and another institution charging a fee to customers to count the cash that they wanted to deposit in their savings accounts. The GOES were concerned about these abuses, but felt it had reached an accord with the banking sector that would avoid government mandated interest rate caps. ¶8. (SBU) The Ambassador welcomed the good news and noted the problems of government mandated price caps. He explained that when New Jersey government officials tried to mandate caps on auto insurance rates that the insurance companies simply took their business elsewhere, causing even greater problems for the government. Ayala and Montenegro reiterated that the accord reached with ABANSA should avoid rate setting by decree. Montenegro said the plan should be well underway by the end of January. ¶9. (SBU) Under the agreement with ABANSA, credit card rates and fees would be published on a regular basis. This would allow consumers to compare costs and thereby increase competition. The same would be true for loans. The GOES is also working with the U.S. Treasurer,s Office on a financial education project for consumers. The banks would also establish an ombudsman office to address client complaints before they were elevated to the GOES Consumer Protection Office. Further, the banks would establish programs to help clients with high debts to help them refinance those debts. Comment -------------- ¶10. (SBU) Though sincere in wanting to preserve free market principles, President Saca is also very focused on trying to secure another ARENA party victory in the next elections. Saca,s political message has come across loud and clear to his officials. However, it is getting to the point where ARENA is starting to ignore the very policies that got them elected and established the country as a desirable place for investment. We will continue to press GOES officials that the best way to get re-elected is to stick with what got them there in the first place. President Saca has established many social programs that have greatly benefited the people of El Salvador and upon which ARENA can launch a credible election campaign. He need not resort to populist policies. Still, his economic team, particularly his Chief of Staff, has been unable to persuade him otherwise. Perhaps by adding our and Washington interlocutors, voices to the mix we can tilt him back in the right direction. Glazer