PROMINENT ECONOMISTS ON THE POLITICAL SITUATION

C O N F I D E N T I A L SAN SALVADOR 000170

SIPDIS

E.O. 12958: DECL: 02/24/2019
TAGS: ECON PGOV ES
SUBJECT: PROMINENT ECONOMISTS ON THE POLITICAL SITUATION

REF: SAN SALVADOR 102

Classified By: Charge d'Affaires Robert I. Blau, Reasons 1.4(B),(D)


1. (C) SUMMARY. Following ARENA's come-from-behind victory
in San Salvador in the January 18 legislative/municipal
elections, prominent economists, including many former
ministers, were optimistic about ARENA's chances in the March
15 presidential race, but concerned over inducements ARENA
may have given to the smaller parties to pull out. The ARENA
government plan was seen as a serious document, despite
questions over how much new bureaucracy would be created and
how new programs would be funded. The selection and role of
vice-presidential candidate Arturo Zablah, who proclaimed he
would be "Vice President of the Economy," continued to raise
doubts, especially given his tendency to propose new economic
policy off the cuff and without research or data. Likewise,
these ARENA loyalists worried about President Saca's
continued control over ARENA and desire to run again in 2014.
Ultimately, however, the trend in ARENA's favor was driven
by a belief that they were again competitive combined with
lingering doubts over who would run an FMLN-led government.
END SUMMARY.


2. (SBU) In early February, Econcouns and Econoff met
separately with leading economists including former Minister
of Finance Manuel Enrique Hinds, former Minister of Finance
Guillermo Lopez-Suarez, former Central Bank President Rafael
Barraza, former Minister of Economy Miguel Lacayo, former
private banking association director Claudio de Rosa,
economic/financial consultant Luis Membreno, and Mauricio
Choussy, Director of Fitch El Salvador, to discuss the
political situation and the state of the Salvadoran economy.
Post will report on economic discussions septel.

MARCH TOO CLOSE TO CALL
--------------


3. (SBU) All commented on the shift in momentum towards ARENA
following Norman Quijano's win in San Salvador on January 18.
Hinds remarked that ARENA candidate Rodrigo Avila would "owe
any victory" to Quijano. Barraza said that the Quijano
victory had allowed ARENA to turn what was by any measure a
defeat into a public relations victory. Lacayo commented
that the FMLN's handling of the loss of San Salvador had hurt
them, since they came off as "poor losers" and they spent so
much time focused on San Salvador that they were not able to
highlight their other victories effectively. (Note: As noted
in reftel, the FMLN picked up three seats and ARENA lost two
seats in the Legislative Assembly, the FMLN also added to its
tally of mayors at ARENA,s expense. End Note.) Lacayo added
that ARENA had "gone all out" for San Salvador, diverting
resources that cost them several other mayoral races.


4. (C) According to Lacayo, "the right" was now more united
because of a desire to prevent an FMLN victory, and the Avila
campaign would owe any victory to outside efforts, not its
own less-than-competent campaign. He noted that the ARENA
Internet campaign was run by outsiders, and a lot of money
was being spent outside the Avila campaign's control.


5. (SBU) While all thought ARENA benefited overall from the
withdrawal of the PDC and PCN from the presidential race,
analysts split over where PCN votes would go. De Rosa stated
that only maybe 2 out of 3 PCN votes would go to ARENA, but
they would win 19 out of 20 PDC votes. Barraza said that
ARENA would probably get 2 out of 3 votes from the PCN, but
the FMLN would get 2 out of 3 PDC votes. Membreno said that
turnout had been 11 percent higher in the January 2009
elections compared to the 2006 legislative/municipal
election, and he expected a similar higher turnout in March.
In Membreno's view, these approximately 300,000 additional
voters would be the swing block that would actually determine
the election, and he thought the final result would be 51-49
or 52-48. He said that ARENA had new momentum, but it was
too close to call who would win in March.


6. (C) Speaking prior to the formal withdrawal of the small
parties, Hinds said that he understood the PCN had requested
and been promised control over the new port in La Union and
the Corte de Cuentas (roughly equivalent to the GAO) in
exchange for their support. Barraza added that he heard the
PCN had also been pushing for control of the Ministry of
Public Works. Choussy commented that the outcome of the
January elections was terrible for the country,s
institutions, since the continued disproportionate power of
the PCN would only serve to further erode them.

ARENA PLAN SERIOUS, BUT WITH FLAWS
--------------


7. (C) According to Hinds, ARENA gathered prominent
columnists and opinion journalists together for a
pre-announcement briefing on their Government Plan. Neither
the presidential or vice-presidential candidate participated.
Hinds commented that the people giving the briefing were
"serious" and "had data," so he was finally reassured that if
Rodrigo Avila won he would have a good team that "wouldn't
screw things up."


8. (SBU) Barraza also praised the plan as "serious," while
noting several areas of disagreement. He said the plan
created a lot of new government bureaucracy of questionable
benefit. For example, he said, ARENA had looked to the
Chilean model for coordinating social programs and
development and "messed it up" by calling for a Ministry of
Social Development of unclear responsibilities. The Avila
campaign also seemed to have included every single proposal
their working groups have developed, including, Barraza
noted, a "clown college." Barraza was not overly concerned,
however, since he had "never met a President who even looked
at the Government Plan after getting elected."


9. (SBU) Lopez-Suarez expressed concern over the cost of the
Government Plan, which called for a tremendous increase in
government spending without documenting how it would pay for
everything. Lopez-Suarez also noted that the team used old
figures for projected economic growth and tax revenues that
did not accurately reflect El Salvador's decelerating
economy.


10. (C) De Rosa, who assisted the Avila campaign in drafting
parts of the economic plan, said that the team had
intentionally left out ARENA's tax-reform proposals, since
they would not play as well politically. One tax reform
plan, De Rosa said, would be implemented via the banking
regulators. For personal loans, banks would be required to
use official tax returns as the basis for proof of income.
Similarly, for business loans, businesses would be required
to submit their value-added tax payment receipts to the banks
as proof of revenue. De Rosa said this simple regulatory
change would significantly reduce evasion and revenues
without increasing tax rates.

ARTURO ZABLAH A MAJOR CONCERN
--------------


11. (C) ARENA VP Candidate Arturo Zablah's statements on
becoming "Vice President of the Economy" in an Avila
administration were a major cause of concern. AMCHAM
President Armando Arias, a long-time friend of Zablah,
commented that "coming close to power makes some people go a
little crazy." Lopez-Suarez, who attended Monterrey
Technical University with Zablah, remarked that "Arturo is
like a spoiled child who, when he doesn't get his way, will
take his ball and go home." Lopez-Suarez added that Zablah's
opinions could not be swayed by any evidence or data to the
contrary. Barraza said that he still cannot figure out why
Zablah was selected, since all he had managed to bring to the
ticket was "2,000 votes from the FDR."


12. (SBU) An additional concern was Zablah's penchant for
pronouncing policy on the fly. Barraza cited Zablah's
announcement, days after the Government Plan was released,
that the Avila administration would also exempt anyone making
less than $1,000 per month from income tax. Based on rough
calculations, Barraza said, this would exempt 92 percent of
the population and eliminate 1/3 of the income tax base, at a
cost of $85 million. De Rosa, who had been tasked to develop
this tax proposal more fully, acknowledged the cost, but
dismissed it as "only $8 million or so per month," which
"really only caused problems for the government's cash flow."



13. (C) Barraza said that many in the private sector hoped
Ambassador to the United States Rene Leon would become
Technical Secretary to the President (equivalent to Chief of
Staff),since he had enough bureaucratic heft and influence
with Avila to counterbalance Zablah. Barraza was far from
certain, however, that Leon would be willing to give up his
post (or his LPR-status) in Washington.

SACA IN 2014?
--------------


14. (C) Hinds, Barraza, Lopez-Suarez, and Lacayo all thought
that President Saca had been manipulating the campaign,
including the selections of both Avila and Zablah, to
maintain control of ARENA and ensure that Saca himself could
run again in 2014. Lopez-Suarez called Saca the puppeteer
controlling the Avila marionette. Hinds, Lopez-Suarez, and
Lacayo all thought Zablah was put on the ticket in part to
prevent a prominent Vice President from challenging Saca.
Barraza, on the other hand, saw the potential for conflict
between Saca and Zablah in 2014, since he thought Zablah
likely wanted the Presidency as well.


15. (C) Hinds, Barraza, and Lacayo all stated that the three
former ARENA presidents' (Cristiani, Calderon Sol, and
Flores) appearance in the campaign was a sign that the "old
guard" was re-grouping to battle Saca's influence within the
party. Barraza noted, however, that "Saca beat us once
before," and the efforts of the former presidents might not
be enough to stave off Saca.


16. (C) One of Saca's advantages was his massive "war chest."
Lopez-Suarez noted that the Avila campaign had only recently
established a mechanism to receive donations directly.
Before, the money had to flow either through Saca, or through
ARENA's coffers, which Saca controls. Lacayo said that some
prominent ARENA supporters had offered to throw a dinner for
Avila, with a "guaranteed $1 million in donations," provided
that only Avila, his wife, and a personal aide attended --
nobody from the campaign staff was invited. Avila refused.


17. (C) Hinds said that Saca was maneuvering to maintain
control under an Avila administration by controlling the
ARENA block in the National Assembly and getting Saca's man
installed as Minister of Finance. Hinds described the
back-room discussions as "Saca gets Treasury, Zablah gets
Economy, PCN gets the port, and Rodrigo can have the police."



18. (C) According to Lacayo, the distrust of Saca by many in
the "old guard" or business wing of the party did not stem
from any single event. Rather, it was "like a pot slowly
boiling until it explodes." Measures that they felt made
ARENA less democratic, allegations of corruption, the
selection process for both Avila and Zablah, and a sense that
they no longer had a voice within the party all contributed
to their dissatisfaction.

COMMENT
--------------


19. (C) Before January 18, most of these same ARENA-leaning
economists predicted an FMLN victory, and the shift in
momentum and optimism was palpable. Concern about Zablah is
rampant across the private sector, however, with few (if any)
holding a favorable opinion of him, and all hoped to see his
influence in a new administration minimized. Many are
waiting to see not just whether ARENA will win, but whether
Zablah will be handed control of the economic apparatus of
government and whether Saca will retain control of ARENA.
ARENA's surge is likely due to this new sense that Avila now
has a good chance to win combined with lingering and serious
doubts over who would actually control an FMLN-led government.
BLAU