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