VISIT OF DEPUTY ASSISTANT SECRETARY NANCY LEE TO

UNCLAS SECTION 01 OF 03 GUATEMALA 000434 STATE PLEASE PASS TO TREASURY - SARA SENICH SENSITIVE SIPDIS E.O.12958: N/A TAGS: ECON EFIN ETRD PGOV PREL GT SUBJECT: VISIT OF DEPUTY ASSISTANT SECRETARY NANCY LEE TO GUATEMALA Summary -------------- ¶1. (SBU) Treasury Deputy Assistant Secretary for the Americas Nancy Lee visited Guatemala April 17 to attend the Central American Finance Ministers meeting and discuss the impact of the global economic crisis on Guatemala and Central America. In meetings with a variety of private and public sector leaders, DAS Lee underscored the USG commitment to support Guatemala in its efforts to mitigate the political and social impact of the economic crisis. She noted that $1.1 trillion in additional resources was made available to developing countries during the G-20 meeting in London. She also highlighted President Obama's micro-finance initiative. While some private sector leaders expressed concern over in the Government of Guatemala's (GOG) slow recognition of the financial crisis' all agreed that Guatemala's well-managed economy, sound financial system and substantial international reserves have left Guatemala in a better position to efficiently use additional assistance than some other Central American countries. DAS Lee discussed some ways additional bilateral and multi-lateral assistance could be used in Guatemala, including increased credit facilities for small- and mid-sized businesses, support to Guatemala's Conditional Cash Transfer assistance program, and increased trade and infrastructure finance. In addition, DAS Lee suggested that technical assistance by Treasury and World Bank experts in areas such as budgetary control, financial regulation of business, tax policy and administration of the cash transfer assistance program would help modernize Guatemala's economy over the medium and long-term. End Summary. Guatemalan Opinion Leaders -------------- ¶2. (SBU) DAS Lee began her visit by meeting with several Guatemalan opinion leaders, including journalists, economists, and business and trade representatives. Interlocutors agreed that Guatemala had been impacted by the U.S. recession and opined that economic activity would continue to weaken in the coming months. They expressed concern that this would aggravate the already serious problems of poverty and unemployment in Guatemala as well as the social issues of violence, organized crime and narco-trafficking. They expressed concern that the GOG had not anticipated the recession or prepared for it, saying that the GOG had spent "the last twelve months with its head in the sand." ¶3. (SBU) The Director of the Guatemalan Exporters Association stated that agricultural exports have remained strong and that the biggest problem facing agriculture in Guatemala was insufficient production. Guatemalan farmers are not able to take advantage of demand for non-traditional agricultural exports for a number of reasons including a poorly educated work force with poor English skills and a lack of irrigation systems and poor infrastructure. Scholarships for young people to study English in the U.S. are needed. DAS Lee noted that increased resources are being made available through international financial institutions (IFIs) as a result of the G-20 meeting and discussed the need to expand credit to small- and mid-sized businesses and to farmers. She pointed out that, the President's micro-finance initiative is an important effort to address this issue. ¶4. (SBU) Interlocutors suggested the U.S. join the Central American Bank of Economic Integration (CABEI),a request echoed later in the day by Central American Finance Ministers. DAS Lee acknowledged Qday by Central American Finance Ministers. DAS Lee acknowledged the perception that the InterAmerican Development Bank (IDB) focused on larger Latin American countries at the expense of Central America and the important role the CABEI plays in Central America. However, the U.S. prefers to promote reforms to the IMF and IDB to ensure they are adequately addressing the needs of smaller Latin countries, including Guatemala, rather than join a new multilateral institution. Meeting with the Social Cohesion Counsel -------------- ¶5. (SBU) DAS Lee met with members of the Social Cohesion Council, a GOG social services coordinating body administered by Guatemala's First Lady, Sandra Torres de Colom. Meeting participants discussed Guatemala's Conditional Cash Transfer program which seeks to eventually reach approximately 3.5 million Guatemalans living in poverty with direct cash subsistence payments contingent upon keeping their children in school and regular health checkups. Participants noted that the major challenge facing the program in its first year of operation was political opposition due to a perceived lack of transparency and controls. The Social Cohesion Council members stated that the biggest challenge going forward is the increased demand for health and education services from families receiving assistance. DAS Lee suggested that the Council seek technical support and advice from the IMF and the World Bank, which have the benefit of experience in setting up and maintaining such programs in other countries. DAS Lee acknowledged the need for adequate funding and indicated support for the provision of technical assistance. GUATEMALA 00000434 002 OF 003 Central American Finance Ministers' Meeting -------------- ¶6. (SBU) DAS Lee delivered opening remarks to the meeting of Central American Finance Ministers, discussing the U.S. economic situation and noting that U.S. economic recovery and world economic recovery are interconnected. She emphasized Central America's importance to the U.S. given its integration with the U.S. economy. She commented on the depth of the U.S. recession and reported that the U.S. economy showed some signs of bottoming out including mildly improved consumer spending and housing sales. The Finance Ministers were encouraged by the news and expressed their appreciation for DAS Lee's visit, saying that it signals the importance that the Obama Administration places on its economic relationship with Central America, and its commitment to confront the crisis with a strong multi-lateral, organized and integrated response. ¶7. (SBU) The Finance Ministers expressed concern that the decreased economic activity was negatively affecting national budgets, and that, together with reduced remittances, these budget deficits are threatening gains made in reducing poverty in recent years. Ministers from Honduras, Rebeca Patricia Santos Rivera, and Nicaragua, Alberto Jose Guevara Obregon, stated that without external budget support their programs would be difficult to continue. The minister from El Salvador, Guillermo Handal, emphasized his country's severe contraction in credit, especially for construction lending and also expressed the need for budget support as well as expanded credit and trade finance facilities. He said "if democracy does not solve the crisis it will erode support for the democratic process." DAS Lee acknowledged the need for counter-cyclical budget support, but cautioned that the USG could not be expected to provide outright grants for budget support given our large budget deficit. However, the USG was evaluating the possibility of additional technical cooperation on a wide range of issues such as customs harmonization to interdict illicit money flow and taxation. Meeting with Bankers -------------- ¶8. (SBU) Guatemalan bankers expressed satisfaction with the financial system's resiliency. They noted that Guatemalan lending practices are conservative and banks were not affected by the sub-prime losses. However, the general economic slowdown was impacting their business. For example, the apparel industry suffered a reduction of orders resulting in job losses. Demand for credit by the private sector has declined and financial institutions have tightened credit standards based on fear of what may lie ahead for the economy. DAS Lee stated that Guatemala stands out in fiscal and monetary responsibility and thus would have more access to IMF and IDB resources than some of the other countries in the region. The bankers stated that maintaining monetary and fiscal policy discipline and avoiding inflation remained a priority. ¶9. (SBU) DAS Lee discussed the role of development banks, focusing on the private sector involvement in risk-sharing arrangements. The bankers acknowledged that there was not much appetite in Guatemala for public/private partnerships due to a lack of a legislative framework and government inefficiency which leads to skepticism among private investors who would otherwise consider engaging in public projects. The bankers and DAS Lee discussed the need for Qpublic projects. The bankers and DAS Lee discussed the need for infrastructure to support improvements in the economy, but acknowledged that the lack of financing would limit GOG infrastructure projects. ¶10. (SBU) There was a general consensus among the bankers that the crisis was affecting the urban poor more than the rural poor because agricultural exports have remained strong while the urban poor are facing high unemployment and cannot resort to subsistence agriculture to support their families. Meeting with Business Leaders -------------- ¶11. (SBU) DAS Lee met with The Committee of the Associations of the Agriculture, Commerce, Industry and Finance Sectors (CACIF),the most influential business organization in Guatemala. The business leaders agreed that Guatemala's macroeconomic situation is better than in other Central American countries, but were very concerned about the economic downturn. They noted the 100,000 jobs lost in the construction industry in 2008 and the decline in remittances, which constitute more than 10 percent of GDP. Also, textile assembly plants, previously a large employment generator, are suffering from the drop-off in demand. The GOG had failed to anticipate the recession and had based its budget estimates on unrealistic growth assumptions (4.6 percent GDP growth). As a result, the GOG is now experiencing significant budget shortfalls. The business leaders were concerned that if the GOG substantially increased domestic borrowing, it would soak up available liquidity and crowd out private borrowing. Similarly, business leaders worried that increased borrowing would drive up inflation and commodity prices. They said it was important to make credit GUATEMALA 00000434 003 OF 003 SUBJECT: VISIT OF DEPUTY ASSISTANT SECRETARY NANCY LEE TO GUATEMALA available for trade finance, infrastructure improvments and for small- to mid-size farmers. They also suggested that efforts could be made to encourage the GOG to provide an institutional framework for public/private investment vehicles. ¶12. (SBU) On tax reform, the business leaders complained that they bear a disproportionately large share of the tax burden since the majority of Guatemala's population works in the informal sector. Comment -------------- ¶13. (SBU) DAS Lee's visit to Guatemala came at an important moment when both public and private sector leaders are coming to grips with the impact of the global economic downturn in Guatemala. Her visit sent an important signal to Guatemala's financial community that the United States takes Guatemala and Central American economic recovery seriously and that the Obama Administration is committed to continuing and improving close economic and trade relations with Guatemala. [End Comment] ¶14. This cable has been cleared with The Western Hemisphere Office at the Department of Treasury.