Identifier
Created
Classification
Origin
10SANSALVADOR43
2010-01-28 17:10:00
CONFIDENTIAL
Embassy San Salvador
Cable title:  

Scenesetter for Your Visit to El Salvador

Tags:  ECON ETRD PREL PGOV 
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R 281710Z JAN 10
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0267
INFO RUEHME/AMEMBASSY MEXICO
RUEHSN/AMEMBASSY SAN SALVADOR
C O N F I D E N T I A L SAN SALVADOR 000043 

SIPDIS
FOR A/S FERNANDEZ FROM CHARGE D'AFFAIRES BLAU

E.O. 12958: DECL: 2020/01/28
TAGS: ECON ETRD PREL PGOV
SUBJECT: Scenesetter for Your Visit to El Salvador

CLASSIFIED BY: Robert I. Blau, Charge d'Affaires; REASON: 1.4(D)

C O N F I D E N T I A L SAN SALVADOR 000043

SIPDIS
FOR A/S FERNANDEZ FROM CHARGE D'AFFAIRES BLAU

E.O. 12958: DECL: 2020/01/28
TAGS: ECON ETRD PREL PGOV
SUBJECT: Scenesetter for Your Visit to El Salvador

CLASSIFIED BY: Robert I. Blau, Charge d'Affaires; REASON: 1.4(D)


1. (C) Embassy San Salvador warmly welcomes you to El Salvador.
Your visit will reinforce the U.S. policy of active engagement with
the left-of-center GOES, which strengthens the moderate, pragmatic
elements in the new government. President Mauricio Funes has an 80
percent approval rating; good relations with the U.S. has a 90
percent rating. Funes has endeavored to make the U.S. and Brazil
his closest allies, though the orthodox part of the left-wing FMLN
is trying to pull his administration in a more radical direction
and carries out its own, Chavista foreign policy. President Funes'
non-FMLN campaign support group, the Friends of Mauricio (now the
Citizen Movement for Change),is largely in control of the economic
apparatus of El Salvador, and you will meet most of them during
your visit. El Salvador's economy remains mired in recession, and
will depend mostly on US economic growth, rather than GOES action,
to recover. The GOES lacks a clear economic policy, which is
fueling uncertainty and potentially slowing new economic activity.




STATE OF THE ECONOMY AND ECONOMIC POLICY

--------------




2. (SBU) According to preliminary figures, El Salvador's economy
contracted between 3.3 and 3.5 percent for 2009, its worst
performance since the end of El Salvador's civil war. Exports fell
16.5 percent and imports fell 25.6 percent, while remittances,
which make up about 18 percent of El Salvador's economy, fell 8.5
percent. Both GOES and private economists expect the recession to
continue through at least the first half of 2010, with growth
estimates between -2.5 percent and +0.5 percent for the year. El
Salvador's economy is closely tied to the US economy, with roughly
a one-year lag, and the most important factors for a Salvadoran
recovery will be sustained growth and lower Salvadoran-immigrant
unemployment in the US.




3. (SBU) The Funes Administration inherited a difficult fiscal
situation and sizable deficit, limiting its ability to engage in
counter-cyclical fiscal policy. To shore up its finances, the GOES

successfully pursued new international loans from the World Bank
and Inter-American Development Bank, issued new Eurobonds, and
signed an agreement with the International Monetary Fund. While
the GOES has addressed its immediate funding needs, it still lacks
the revenue to pursue its social agenda.




4. (SBU) The GOES's lone economic "success" was passage of a tax
reform package in late December. This introduced new taxes on
alcohol, cigarettes, non-alcoholic beverages, and interest on
savings, which the GOES optimistically projects will raise $170
million in new revenue. We remain concerned about the World Trade
Organization and CAFTA-DR implications of the new alcohol tax,
which imposes higher rates for mostly imported products compared to
locally produced alcohol.




5. (C) Overall, the GOES appears to have no clear economic policy,
and no one from the Economic Cabinet has emerged publicly as a
leadership figure. The GOES has not taken steps to reduce
uncertainty or bolster consumer confidence. The private sector,
which has been wary of a left-wing government, has lost much of its
access and has been prone to assume and speculate the worst about
GOES, and especially FMLN, intentions. This continued uncertainty
remains one of two key impediments to new private sector
investment; the other is public security (see below).



DISASTER RECOVERY

--------------




6. (SBU) Severe flooding and landslides triggered by a tropical
depression over a four-day period in early November caused
significant loss of life and economic damage in El Salvador. The
hardest hit area was the central part of the country near the
capital of San Salvador. In the department of San Vicente, the
Acahuapa River flooded several communities, and a landslide off the


base of the San Vicente Volcano caused an estimated 82 deaths. The
GOES currently estimates a total of 199 deaths countrywide and
there were, at the peak of the crisis, approximately 14,295
homeless in 132 shelters in the affected areas. Heavy losses in
the agricultural sector have many in the GOES concerned about
short-term food security. USG relief supplies were distributed to
the most severely affected areas aided by the use of four JTF Bravo
helicopters. U.S. military assistance also provided damage
assessments for infrastructure, and carried out local humanitarian
projects. Additional US assistance funds will be required to meet
the recovery and mitigation needs facing El Salvador's struggling
economy. While the GOES understands that the Haiti earthquake has
become the focus of most disaster assistance, and they themselves
have offered help, they continue to hope for USG support.



CAFTA-DR ANNIVERSARY

--------------




7. (SBU) Your visit comes a month before the fourth anniversary of
the entry into force of CAFTA. El Salvador, the first country
where CAFTA entered into force, is working hard, with considerable
help from USAID, to expand trade opportunities under the agreement.
By 2007, according to GOES figures, 78 percent of exporters under
CAFTA were micro, small, or medium enterprises, which principally
export non-traditional products such as 'ethnic' foods. This has
helped diversify El Salvador's economy and create new job
opportunities, especially for women and the rural poor. CAFTA has
also helped El Salvador increase its exports to its Central
American neighbors, strengthening regional integration. Despite
the FMLN party's opposition to the passage of CAFTA, the Funes
Administration has remained publicly and privately committed to the
agreement.



PATHWAYS TO PROSPERITY

--------------




8. (SBU) El Salvador hosted the Second Pathways to Prosperity
Ministerial on May 31, 2009, one day before President Funes'
inauguration, and the Funes Administration, led by Vice Minister of
Foreign Affairs Jaime Miranda and Vice Minister of Economy Roger
Hernandez, have emphasized their desire to remain a major
participant. The GOES is working to identify its priority areas
for Pathways prior to the Costa Rica Ministerial in March.



SECURITY

--------------




9. (C) Although El Salvador has made remarkable progress since the
1992 Peace Accords, violent crime remains unresolved. Street gang
activity such as murder, extortion, robbery, and kidnapping
undermine public security and erode confidence in the ability of
the police and the judiciary. The Merida Initiative, coupled with
ongoing efforts to strengthen the police and enact judicial reform,
aims to improve public security and the rule of law. Recent
Legislative Assembly approval of a constitutional amendment to
permit wiretapping, with broad political support, is an important
step; implementing legislation is in the works. The significant
USG commitment to improving regional security, as evidenced by the
presence of the Cooperative Security Location (CSL) and the
International Law Enforcement Academy (ILEA),also provides us with
additional credibility with the Funes administration.




10. (U) A recent increase in violent crime prompted President Funes
to sign an emergency decree November 5 to deploy 3,500 soldiers for
180 days to occupy and control 28 of the most violent urban areas
in the country. These forces supplement the 1,700-2,000 troops
already operating joint patrols with the National Civilian Police
(PNC),meaning that more than half of the military's 10,000 forces
will be engaged in domestic law enforcement.


11. (U) The private sector identifies the deteriorating security
situation as its number one concern. A recent study sponsored by
the Salvadoran Chamber of Commerce estimated business losses due to
security at $2.1 billion.



THE WAY AHEAD

--------------




12. (C) Although the Salvadoran electorate may have granted
President Funes a mandate for reform, by all appearances the
Salvadoran public at-large expects him to work with the country's
dynamic private sector, and to maintain good relations with the
United States. The public is pleased with Funes' work so far - his
approval rating is above 80 percent in recent polling. Increasing
tensions between Funes and the FMLN could undermine governability
and potentially damage the bilateral relationship with the U.S.
Center-right ARENA must come to grips with its electoral defeat and
better assume its new role as an opposition party. Other
opposition parties, civil society leaders, business interests, and
the press are all reasonably solid institutions. They also pay
attention to signals from the USG, which traditionally has great
influence in El Salvador. Strong economic engagement, which
bolsters the moderates in the Funes government, is a key area to
this developing relationship, one which your visit will strongly
support.
BLAU