VZCZCXRO5665
RR RUEHLMC
DE RUEHSN #0876/01 2061844
ZNR UUUUU ZZH
R 241844Z JUL 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 9842
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 SAN SALVADOR 000876 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ES
SUBJECT: FITCH CENTRAL AMERICA VIEWS ON EL SALVADOR 
 
REF: SAN SALVADOR 861 
 
Summary 
------- 
 
¶1. (SBU) Mauricio Choussy, Managing Director of Fitch ratings for 
Central America, Belize and Panama, is optimistic about export 
growth and inflation, but pessimistic about the Government of El 
Salvador's (GOES) fiscal situation because of the spiraling cost of 
inefficient subsidies.  He fears a Central American liquidity crunch 
that could be exacerbated by a victory by the leftist FMLN in 
January 2009 legislative elections, but forecasted an ARENA victory 
in the March 2009 presidential election.  End summary. 
 
The Positive: Export Growth, Low Inflation 
------------------------------------------ 
 
¶2. (U) On July 14, Econoff discussed the overall Salvadoran economic 
situation with Mauricio Choussy, the Managing Director of Fitch 
ratings for Central America, Belize and Panama, (and former Central 
Bank President during the Duarte administration). As a risk analyst, 
Choussy said his job was mostly about seeing the negative, but he 
did see a few bright spots.  First, though rising significantly 
above what it has been in the last several years (9% annual rate 
through June 2008), El Salvador's inflation rate remains one of the 
lowest in Latin America.  Second, for the first time in several 
years, in April 2008 exports grew more than imports. 
 
¶3. (SBU) Contrary to most other Salvadoran analysts, Choussy did not 
view rising food prices as a major economic problem.  Instead, he 
thought it offered a real opportunity to make inroads against 
chronic unemployment and underemployment in rural areas. 
 
Problematic Subsidies 
--------------------- 
 
¶4. (SBU) Choussy identified inefficient government subsidies as a 
major fiscal problem.  First, the subsidies, especially for propane 
gas, electricity, and transportation, are not properly targeted, 
going to rich and poor alike; Choussy said he personally received 
propane and electricity subsidies.  Second, the amount of the 
subsidies depends on the commodity price, making it almost 
impossible for the GOES to budget.  Choussy doubted that the GOES 
would be able to pay all its subsidies on time.  Finally, the method 
for paying the subsidies is poorly designed.  Choussy noted that, 
for transportation, the subsidies were given per bus regardless of 
passengers, so some of the transport companies had started running 
empty buses. 
 
¶5. (SBU) The electricity subsidies were particularly problematic, 
especially the debts owed by the state-owned hydropower authority 
(CEL).  Choussy estimated CEL would ultimately need to pay about 
$400 million in the next year.  He said that CEL had originally 
hoped to fund its debts by securitizing 25% of its generating 
capacity on the stock market, but as its debts continue to rise, it 
has had to abandon that plan.  Instead, CEL would likely have to 
raise new external debt through a trust, which lacked of financial 
transparency.  (NOTE.  On July 22, the GOES announced that it would 
phase out the subsidy for industrial users.  Details reported 
septel.  END NOTE.) 
 
¶6. (SBU) Local electric companies were now having problems managing 
their cash flow.  With tariffs artificially set by the government, 
CEL unable to pay subsidies on time, and banks unwilling to lend to 
them, the electric companies were no longer able to manage their 
cash flows and also maintain service.  This had lead Fitch to 
downgrade U.S.-owned electricity distributor AES. 
 
¶7. (SBU) In Choussy's view, an underlying problem is that the Saca 
Administration refuses to speak honestly about the economy.  The 
rest of Central America is facing similar problems, he said, 
especially rising energy prices, but the difference was that their 
leaders acknowledging that difficult times lay ahead.  The Saca 
Administration, in contrast, was continuing to issue "rosy growth 
projections" and saying that "everything is fine."  He particularly 
faulted the current budget, since in an election year spending will 
always be higher than projected, but the GOES did not plan for a 
deficit. 
 
¶8. (SBU) Choussy also criticized the recently approved $0.04 tax on 
incoming international phone calls, calling it a tariff barrier to 
foreign services and a possible CAFTA-DR violation.  President Saca 
is in favor of the tax, but has not yet signed the legislation. 
 
 
LIQUIDITY CRUNCH? 
 
SAN SALVAD 00000876  002 OF 002 
 
 
----------------- 
 
¶9. (SBU) Choussy's main preoccupation about the Salvadoran economy 
in 2009 was a potential "liquidity crunch."  While the Salvadoran 
financial sector is now entirely owned by international banks, those 
banks are having economic problems in their home countries.  In his 
view, the international banks will be focused on trying to make the 
most profitable loans with the least amount of risk, and would 
therefore avoid El Salvador.  At the same time, he added, sovereign 
wealth funds "aren't interested" in investing in El Salvador.  That 
leaves local deposits to fund new loans, and he was concerned that 
bank deposits had decreased around $200 million between March and 
April.  As credit availability declines, Choussy expected interest 
rates to rise.  He added that liquidity is a potential problem in 
all Central America, not just El Salvador. 
 
¶10. (SBU) Choussy's worst-case liquidity scenario is a large FMLN 
victory in the January 2009 municipal and legislative elections, 
with uncertainty about the outcome of the March 2009 presidential 
elections.  In a dollarized economy, he noted, capital doesn't need 
to leave the country - people can just pull money out of the banks 
and stuff it in their mattresses -- and the political uncertainty 
could lead to a run on the banks.  He said this worst-case scenario 
could be like "Panama under Noriega," where so much money was taken 
out of circulation that there wasn't enough for even basic economic 
transactions. 
 
ELECTION OUTLOOK 
----------------- 
 
¶11. (SBU) Choussy forecasted an FMLN victory in the legislative 
elections, but an ARENA victory in the presidential race, despite 
their current poor showing in the polls.  He thought ARENA's "feud 
with the private sector" was coming to an end, which would let them 
finally focus their attention on the FMLN.  Ultimately, he said, a 
campaign based on the "fear factor" of total FMLN control of 
government should be enough to sway the election to ARENA. 
 
COMMENT 
------- 
 
¶12. (SBU) Choussy is a keen observer of the Salvadoran economy, 
though a pessimist by both nature and occupation.   He was 
pessimistic about the Saca Administration's ability to handle the 
current economic situation in El Salvador.  While he did not tip his 
hand on any future ratings changes, new Fitch reports are likely to 
be negative.  Nevertheless, Choussy tries to keep a long-term 
perspective; despite frequent bad news, he said, "things aren't as 
bad now as they were in 1988."  In fact conditions are not as bleak 
as they could be, especially given the economic slowdown in the USA, 
El Salvador's largest trading partner.  Respected think tank FUSADES 
recently lowered its projection for 2008 GDP growth rate to 3.8%. 
Still, that rate of growth is nearly double the annual economic 
growth El Salvador had experienced in the decade leading up to the 
2006 implementation of CAFTA-DR. 
 
Glazer