IMF LIKELY TO ASSIST EL SALVADOR WITH NEW STAND-BY

UNCLAS SAN SALVADOR 000811

STATE PASS USAID/LAC

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EFIN EAID ECON IMF ES
SUBJECT: IMF LIKELY TO ASSIST EL SALVADOR WITH NEW STAND-BY
ARRANGEMENT

REF: A. SAN SALVADOR 531

B. 08 SAN SALVADOR 1332


1. (SBU) SUMMARY. El Salvador is likely to receive a new Stand-By
Arrangement from the International Monetary Fund (IMF),according to
a visiting IMF assessment team. The IMF also expects to issue
letters supporting the release of $300 million in Inter-American
Development Bank loans and the issuance of $800 million in Eurobond
debt. Neither El Salvador's rising budget deficit nor failure to
pass regulatory reforms is likely to affect the IMF's decision. IMF
support for El Salvador's fiscal difficulties is preferable to the
GOES seeking assistance from other players like Venezuela. On the
other hand, El Salvador could benefit from IMF leverage to push
various fiscal and legal reforms, but that is not part of the deal.
END SUMMARY.


2. (SBU) A visiting IMF assessment team advised Econoffs August 26
that the IMF would likely give El Salvador a new Stand-By
Arrangement (SBA) by their November board meeting, replacing El
Salvador's $800-million one-year provisional SBA approved last
December. The new SBA would likely be on the order of $800 million
over three years, though details would be worked out in during a
planned September assessment. A three-year SBA would be less
expensive for El Salvador in the long-run.


3. (SBU) Based on their current visit, the IMF team expected to
issue a letter to the Inter-American Development Bank (IDB) in
support of releasing the final $300-million tranche of the $500
million loan approved in December. This tranche would be used to
support social programs as previously approved by the National
Assembly (reftel A). The IMF team likewise planned to come out in
support of El Salvador's plan to issue $800 million in Eurobonds
later this year. The proceeds of the bond issuance would be used to
reduce El Salvador's high levels of short-term (one year or less)
Letters of Treasury ("letes"),which had caused serious fiscal
problems for the previous government (reftel B).


4. (SBU) Asked whether El Salvador's rising fiscal deficit, now
estimated to hit 6%, would be a problem for the IMF, the team
replied that the Fund recognized much of El Salvador's fiscal and
economic problems were because of the international financial
crisis, and so they were not overly concerned. One economist noted
that the GOES's internal projections showed a significant deficit
for 5 years before it started going back down. The IMF team was
also unconcerned by potential balance of payments problems because
of falling remittances, a concern noted by Fitch ratings. One
economist stated that "(balance of payments problems) tended to
correct themselves," and that lower consumer demand and imports
would more than compensate for reduced remittances.


5. (SBU) Likewise, the IMF team indicated that El Salvador's failure
(or potential failure) to pass IMF-recommended reforms for
regulation of the financial sector was unlikely to affect a possible
SBA. The principal reform, a law merging the existing
Superintendents of the Financial System, Pensions, and Stock Market
into a single entity, had stalled in the National Assembly at the
end of May. One team member stated that the IMF now recognized its
limited ability to make countries pass reform laws.


6. (SBU) COMMENT: This "new" IMF, apparently unconcerned with
deficits and reforms, marks a noticeable change from the IMF's
historical attitude. One of the team members, a 20+ year IMF
veteran, remarked that "the kind of things the Fund would agree to
now" would make the people he started with "roll over in their
graves." While IMF support for El Salvador is preferable to the
GOES seeking assistance from other players like Venezuela, the loss
of IMF leverage to push various fiscal and legal reforms is a missed
opportunity. END COMMENT.

BLAU