VZCZCXYZ0009
OO RUEHWEB

DE RUEHSN #0080/01 0282246
ZNR UUUUU ZZH
O 282246Z JAN 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8891
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

UNCLAS SAN SALVADOR 000080 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EFIN ECON EINV
SUBJECT: ES INVESTMENT CLIMATE: SLIP SLIDING AWAY? 
 
REF: A. 2007 SAN SALVADOR 2383 
 
     ¶B. SAN SALVADOR 33 
 
¶1. (SBU) Summary.  In a January 23 meeting with Presidencia 
Secretario Tecnico (President Saca,s Chief of Staff) Eduardo 
 
SIPDIS 
Ayala Grimaldi, the Ambassador warned the Saca Administration 
that its recent actions to curry popular approval were 
hurting its investment climate.  Saca,s promise that 
electricity prices would be frozen through the end of his 
term in June 2009 and Administration efforts to control loan 
and credit card interest rates, while possibly helpful in the 
short run, could end up doing more harm than good.  Ayala 
claimed that recent GOES actions to reduce electricity 
distribution tariffs were based on technical, not political, 
grounds.  However, he agreed to work with electric 
distributors to find a suitable compromise.  However, no 
progress has been made since the meeting.  Financial System 
Superintendent Montenegro assured the Ambassador that an 
accord with the banking sector would avoid having the GOES 
set loan and credit card interest rate caps by decree.  End 
Summary. 
 
Electricity Rate Setting ) Not Political? 
----------------------------------------- 
 
¶2. (SBU) Repeatedly over the last year plus, President Saca 
has stated that electricity prices would not increase, 
despite the fact that El Salvador is dependent upon thermal 
fuel generation for more than half of its electricity needs. 
During the December announcement of his Family Alliance Plan 
(Alianza por la Familia) (reftel A), President Saca said 
electricity prices would be frozen for the remainder of his 
term in office, which ends in June 2009.  Electricity 
distribution rates were under review to set rates for the 
five-year period of 2008-2012 (reftel B).  Secretario Tecnico 
Ayala said that GOES electricity and telecommunications 
regulator SIGET hired a consultant and that they had been in 
discussions with the electricity companies for many months to 
reach an accord on the new rates.  He said that in the end, 
SIGET and the companies could not reach an agreement, but the 
decision to go forward with the reduction was based on 
technical grounds. 
 
¶3. (SBU) The Ambassador said he understood that consultants 
might have differing opinions; however, the electricity 
companies felt strongly enough about the apparent problems 
with the process to file law suits with the Salvadoran Courts 
to challenge the process.  He added that, as an investment 
banker, he was looking at the situation from a broader 
perspective.  The Ambassador showed Ayala an article where 
Fitch Ratings had placed U.S.-based electricity distributor 
AES on &Rating Watch Negative8 because of SIGET,s recent 
tariff rate reductions.  He pointed to the section of the 
article that noted the &company,s exposure to increasing 
regulatory risk and its vulnerability to social and political 
interference.8 
 
¶4. (SBU) The Ambassador emphasized that this was not about a 
battle of consultants, but the unbiased observations of 
investment analysts.  He said that investors, both domestic 
and foreign, look at those reports when considering whether 
to invest in El Salvador.  The country had a well-earned 
reputation as a place to invest in Central America and it 
would be a shame to sacrifice it in the hope of garnering a 
few more votes.  Besides, he added, good policy is good 
politics.  The Economic Counselor added that the vast 
majority of the people would only see a 21 cent per month 
decrease in their electric bills as a result of the 
distribution tariff rate reduction.  The Ambassador noted 
that reduced revenues could affect electricity company 
investment in the sector, which could eventually lead to 
electricity shortages just before next year,s elections.  In 
addition, interference in the regulatory system would not 
help El Salvador meet the government and regulatory 
performance indicators used by the Millennium Challenge 
Corporation (MCC). 
 
¶5. (SBU) Ayala said that the GOES would work with the 
electricity companies to resolve the impasse, even though the 
rates had been published.  He said that SIGET officials would 
meet with AES right away to try to reach an accord.  He also 
knew that AES had been making the rounds in Washington to 
present its side of the case.  Ayala assured the Ambassador 
that the GOES did not want to interfere with free market 
principles, but it also wanted to protect the consumer.  The 
Ambassador responded that he would be willing to discuss the 
issue with President Saca, if necessary. 
 
¶6.  (SBU) AES Country Manager Fernando Pujals and Regional VP 
Julian Nebreda met with SIGET Superintendent Fernando 
Arguello on January 24.  Pujals told Econ Counselor on 
January 28 that the meeting had been &very disappointing8 
and Arguello said he could do nothing unless he received 
instructions from President Saca.  AES officials had been 
unsuccessful in meeting with Ayala, who was involved in the 
meeting of MCC CEO Danilovich on January 24-25.  Pujals was 
going to try and see him on January 28, before Pujals left 
for meetings at AES headquarters. 
 
Banking Sector Also Feels the Heat 
---------------------------------- 
 
¶7. (SBU) Post has had numerous conversations with the banking 
sector about the latter,s concerns with Saca,s Alianza por 
la Familia announcements to cap interest rates on loans and 
credit cards.  Aware of those concerns, Ayala said he asked 
Financial System Superintendent Luis Armando Montenegro to 
attend the meeting with the Ambassador.  Montenegro explained 
the recent meetings with the private banking association 
(ABANSA).  He noted two of the more egregious problems in the 
sector, such as one institution charging 70% in credit card 
interest rates and another institution charging a fee to 
customers to count the cash that they wanted to deposit in 
their savings accounts.  The GOES were concerned about these 
abuses, but felt it had reached an accord with the banking 
sector that would avoid government mandated interest rate 
caps. 
 
¶8. (SBU) The Ambassador welcomed the good news and noted the 
problems of government mandated price caps.  He explained 
that when New Jersey government officials tried to mandate 
caps on auto insurance rates that the insurance companies 
simply took their business elsewhere, causing even greater 
problems for the government.  Ayala and Montenegro reiterated 
that the accord reached with ABANSA should avoid rate setting 
by decree.  Montenegro said the plan should be well underway 
by the end of January. 
 
¶9. (SBU) Under the agreement with ABANSA, credit card rates 
and fees would be published on a regular basis.  This would 
allow consumers to compare costs and thereby increase 
competition.  The same would be true for loans.  The GOES is 
also working with the U.S. Treasurer,s Office on a financial 
education project for consumers.  The banks would also 
establish an ombudsman office to address client complaints 
before they were elevated to the GOES Consumer Protection 
Office.  Further, the banks would establish programs to help 
clients with high debts to help them refinance those debts. 
 
Comment 
------- 
 
¶10. (SBU) Though sincere in wanting to preserve free market 
principles, President Saca is also very focused on trying to 
secure another ARENA party victory in the next elections. 
Saca,s political message has come across loud and clear to 
his officials.  However, it is getting to the point where 
ARENA is starting to ignore the very policies that got them 
elected and established the country as a desirable place for 
investment.  We will continue to press GOES officials that 
the best way to get re-elected is to stick with what got them 
there in the first place.  President Saca has established 
many social programs that have greatly benefited the people 
of El Salvador and upon which ARENA can launch a credible 
election campaign.  He need not resort to populist policies. 
Still, his economic team, particularly his Chief of Staff, 
has been unable to persuade him otherwise.  Perhaps by adding 
our and Washington interlocutors, voices to the mix we can 
tilt him back in the right direction. 
Glazer