SALVADORAN FINANCIAL SYSTEM READY FOR JANUARY ELECTION

UNCLAS SAN SALVADOR 000053

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV ES
SUBJECT: SALVADORAN FINANCIAL SYSTEM READY FOR JANUARY ELECTION

REF: A. 08 SAN SALVADOR 1364

B. 08 SAN SALVADOR 1084 (NOTAL)


1. (SBU) SUMMARY. The Salvadoran financial system is prepared for
possible significant capital flight and/or bank runs following the
January 18 legislative elections, according to the executive
director of the private banking association ABANSA. Reserves stand
at 29 percent of deposits and the Central Bank, at ABANSA's request,
had increased its cash on hand. The banking sector had not seen any
abnormal change in deposits in the run-up to the January elections;
ABANSA will notify the Embassy if any unusual activity occurs.
Credit lines from international financial institutions were helping
to ease pressure on the banks and boost confidence in the system.
Coordination between the government and private sector had also
improved since late 2008. While the sector is only likely to
experience significant capital flight should the (left-wing) FMLN
win an outright majority in the National Assembly, the January
elections will serve as an important test-run for the banks'
preparations for the March presidential elections. END SUMMARY.


2. (SBU) Marcella de Jimenez, Executive Director of the Salvadoran
Private Banking Association (ABANSA),told Econoff on January 16
that the banks and the government were well prepared for possible
capital flight and/or bank runs following January 18 legislative
elections. The worst capital flight in the country's history (1980)
had been about 17 percent of deposits, while Central Bank reserves
now stood at 29 percent of deposits. At ABANSA's request, the
Central Bank had increased its physical cash on hand, and the
Central Bank had advised them a plane with more cash could "be in
the country within hours." ABANSA was coordinating its preparations
with the government's liquidity commission, and the Central Bank had
also taken steps to improve its inter-bank lending mechanisms.


3. (SBU) Jimenez noted that, contrary to ABANSA's earlier
expectations, bank deposits in El Salvador had not shifted in the
run-up to the elections, a fact she attributed to the international
financial crisis. Before, wealthy Salvadorans would move money to
U.S. banks, but now they were unsure about the health of those
banks, and they were also earning a better interest rate in El
Salvador.


4. (SBU) Above-normal reserves meant reduced lending, Jimenez
acknowledged, and this was having a negative effect on the economy.
The $400 million credit line (ref A) from the Inter-American
Development Bank (IDB),which had to be used for loans, was helping
mute private sector criticism. Jimenez added that the $800 million
Stand-By Arrangement (SBA) with the International Monetary Fund
(IMF) was also boosting confidence in the system.


5. (SBU) COMMENT: The banking sector only expects significant
capital flight following the January elections should the
(left-wing) FMLN perform better than expected, e.g., winning an
outright majority in the legislative elections. Regardless of the
outcome, the January elections provide the first test for the
banking sector's preparations. ABANSA's coordination with the
liquidity commission is a welcome improvement, as the government had
previously excluded the private sector. ABANSA will notify the
Embassy should they observe any unusual activity in the sector
immediately after the elections.

Glazer