Scenesetter for Your Visit to El 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) ¶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