FINANCIAL CRISIS ACCELERATES REDUCTION OF LENDING TO

UNCLAS SAN SALVADOR 000039 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ES SUBJECT: FINANCIAL CRISIS ACCELERATES REDUCTION OF LENDING TO CONSTRUCTION SECTOR ¶1. SUMMARY: The construction industry has raised alarms over the impact of the global financial crisis on El Salvador's construction sector. While public funding for infrastructure and low-income housing continue, credit shortages have delayed commercial building projects. Salvadoran banks were already adjusting loan criteria to limit risk in construction projects when El Salvador's worsening economic outlook and pending elections contributed to more cautious lending policies. To support the sector, industry groups are pressing for the GOES to subsidize housing loans, expedite public procurement and address the credit shortage. With budget constraints likely to limit GOES intervention, builders will need to adjust to changing economic conditions and lending criteria. END SUMMARY. ¶2. According to Central Bank estimates (based on cement sales), construction activity fell by 11.8% and 16.4% in September and October 2008 compared to the same months in 2007. According to the construction chamber of commerce (CASALCO),total credit for residential and commercial construction fell 16% from $654 million in 2007 to $549 million in October 2008, with credit to commercial projects down more than 30%. ¶3. CASALCO Executive Director Ismael Nolasco told Econoff that tighter credit markets in October-November had frozen funding for new commercial real estate projects while some ongoing projects were delayed. CASALCO reported that construction companies dismissed over 14,000 workers in October 2008. One of El Salvador's largest real estate development companies, Grupo Roble, reportedly laid off 21 of its 24 architects in October-November. BANKS ADJUST LENDING CRITERIA -------------- ¶4. Tighter lending requirements were already affecting construction prior to financial crisis. According to banking industry sources, several international banks started adjusting loan criteria in 2007 to limit risk after finding their recently acquired Salvadoran banks were issuing loans with no money down for up to 110% of the projected value of some real estate projects. Managers at Citibank told Econoff they are now financing up to 80% of the project value, while Nicola Angelucci, President of the state-owned Multi-Sector Investment Bank (BMI),said that private banks were typically financing 50-80% of projected value depending on project risk. Angelucci added that the members of the construction sector "crying the loudest for a bailout" were those whose projects wouldn't get funding even under normal circumstances. FUNDING FOR LOW INCOME HOUSING CONTINUES -------------- ¶5. State-funded low-income housing has been so far shielded from the credit crisis. The Social Housing Fund (FSV) an autonomous Salvadoran agency that funds low-income housing, is in good financial position to weather the credit crunch after raising $350 million through bond offerings through August. FSV Executive Director Rene Ayala told Econoff that FSV does not plan to issue additional bonds in 2009-2010, unless economic conditions significantly reduce its cash flows. PRESSURE FOR GOES ACTIONS -------------- ¶6. To support the construction sector, CASALCO is pressing for measures to expedite public investment, subsidize housing loans and alleviate credit shortages. The chamber proposed a "Preferential Interest Rate Law" that would involve the GOES in guaranteeing housing loans and subsidizing 2-4% of interest costs through tax credits to banks. They argue that increased employment and tax revenues would compensate for lost revenue from these tax credits. The Mesoamerica Project (formerly Plan Puebla Panama) will provide $33 million in seed money for a regional program to insure construction loans, but CASALCO estimates that El Salvador's $6 million of this funding will have limited effect. ¶7. CASALCO has criticized El Salvador's public procurement law for failing to allow for short-term changes in material costs. Nolasco noted that 24% of public tenders for infrastructure projects were suspended for lack of qualified bids in 2008 - up from 14% in 2007 - as prices for some materials rose 50-70% from January to October ¶2008. CASALCO wants to reform public procurement law to allow adjustment of short-term contracts (for less than 12 months) to account for changing material costs. COMMENT -------------- ¶8. While the construction sector blames its woes on the global financial crisis, the crisis served primarily to accelerate ongoing adjustments towards more conservative lending practices. International banks were already evaluating projects more critically and tightening lending criteria before the downturn and approaching elections forced the banks to become more cautious. Declining construction activity is also part of El Salvador's broader economic trend that saw declining activity in most sectors in October (septel). With budget constraints likely to limit GOES intervention, construction companies will need to adjust to changing economic conditions and lending criteria. GLAZER