VZCZCXYZ0009
PP RUEHWEB

DE RUEHSN #0039/01 0132106
ZNR UUUUU ZZH
P 132106Z JAN 09
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 0576
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN SALVADOR 000039 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ES
 
SUBJECT: FINANCIAL CRISIS ACCELERATES REDUCTION OF LENDING TO 
CONSTRUCTION SECTOR 
 
¶1.  SUMMARY:  The construction industry has raised alarms over the 
impact of the global financial crisis on El Salvador's construction 
sector.  While public funding for infrastructure and low-income 
housing continue, credit shortages have delayed commercial building 
projects.  Salvadoran banks were already adjusting loan criteria to 
limit risk in construction projects when El Salvador's worsening 
economic outlook and pending elections contributed to more cautious 
lending policies.  To support the sector, industry groups are 
pressing for the GOES to subsidize housing loans, expedite public 
procurement and address the credit shortage.  With budget 
constraints likely to limit GOES intervention, builders will need to 
adjust to changing economic conditions and lending criteria.  END 
SUMMARY. 
 
¶2.  According to Central Bank estimates (based on cement sales), 
construction activity fell by 11.8% and 16.4% in September and 
October 2008 compared to the same months in 2007.  According to the 
construction chamber of commerce (CASALCO), total credit for 
residential and commercial construction fell 16% from $654 million 
in 2007 to $549 million in October 2008, with credit to commercial 
projects down more than 30%. 
 
¶3. CASALCO Executive Director Ismael Nolasco told Econoff that 
tighter credit markets in October-November had frozen funding for 
new commercial real estate projects while some ongoing projects were 
delayed.  CASALCO reported that construction companies dismissed 
over 14,000 workers in October 2008.  One of El Salvador's largest 
real estate development companies, Grupo Roble, reportedly laid off 
21 of its 24 architects in October-November. 
 
BANKS ADJUST LENDING CRITERIA 
----------------------------- 
 
¶4. Tighter lending requirements were already affecting construction 
prior to financial crisis.  According to banking industry sources, 
several international banks started adjusting loan criteria in 2007 
to limit risk after finding their recently acquired Salvadoran banks 
were issuing loans with no money down for up to 110% of the 
projected value of some real estate projects. Managers at Citibank 
told Econoff they are now financing up to 80% of the project value, 
while Nicola Angelucci, President of the state-owned Multi-Sector 
Investment Bank (BMI), said that private banks were typically 
financing 50-80% of projected value depending on project risk. 
Angelucci added that the members of the construction sector "crying 
the loudest for a bailout" were those whose projects wouldn't get 
funding even under normal circumstances. 
 
FUNDING FOR LOW INCOME HOUSING CONTINUES 
---------------------------------------- 
 
¶5.  State-funded low-income housing has been so far shielded from 
the credit crisis.  The Social Housing Fund (FSV) an autonomous 
Salvadoran agency that funds low-income housing, is in good 
financial position to weather the credit crunch after raising $350 
million through bond offerings through August.  FSV Executive 
Director Rene Ayala told Econoff that FSV does not plan to issue 
additional bonds in 2009-2010, unless economic conditions 
significantly reduce its cash flows. 
 
PRESSURE FOR GOES ACTIONS 
------------------------- 
 
¶6.  To support the construction sector, CASALCO is pressing for 
measures to expedite public investment, subsidize housing loans and 
alleviate credit shortages.  The chamber proposed a "Preferential 
Interest Rate Law" that would involve the GOES in guaranteeing 
housing loans and subsidizing 2-4% of interest costs through tax 
credits to banks.  They argue that increased employment and tax 
revenues would compensate for lost revenue from these tax credits. 
The Mesoamerica Project (formerly Plan Puebla Panama) will provide 
$33 million in seed money for a regional program to insure 
construction loans, but CASALCO estimates that El Salvador's $6 
million of this funding will have limited effect. 
 
¶7.  CASALCO has criticized El Salvador's public procurement law for 
failing to allow for short-term changes in material costs.  Nolasco 
noted that 24% of public tenders for infrastructure projects were 
suspended for lack of qualified bids in 2008 - up from 14% in 2007 - 
as prices for some materials rose 50-70% from January to October 
¶2008.  CASALCO wants to reform public procurement law to allow 
adjustment of short-term contracts (for less than 12 months) to 
account for changing material costs. 
 
COMMENT 
------- 
 
¶8.  While the construction sector blames its woes on the global 
financial crisis, the crisis served primarily to accelerate ongoing 
adjustments towards more conservative lending practices. 
International banks were already evaluating projects more critically 
 
and tightening lending criteria before the downturn and approaching 
elections forced the banks to become more cautious.  Declining 
construction activity is also part of El Salvador's broader economic 
trend that saw declining activity in most sectors in October 
(septel).  With budget constraints likely to limit GOES 
intervention, construction companies will need to adjust to changing 
economic conditions and lending criteria. 
 
GLAZER