Viewing cable 08SANSALVADOR480
Title: EX-FINANCE MINISTER CRITIQUES SACA GOVERNMENT,

IdentifierCreatedReleasedClassificationOrigin
08SANSALVADOR4802008-04-18 22:35:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy San Salvador
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PP RUEHWEB

DE RUEHSN #0480/01 1092235
ZNY CCCCC ZZH
P 182235Z APR 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 9355
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
C O N F I D E N T I A L SAN SALVADOR 000480 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 04/16/2018 
TAGS: ECON ENRG PGOV ES
SUBJECT: EX-FINANCE MINISTER CRITIQUES SACA GOVERNMENT, 
STATE OF ECONOMY 
 
Classified By: CHARGE D'AFFAIRES MICHAEL A. BUTLER, REASONS 1.4(B,D) 
 
¶1. (C) SUMMARY. According to former Finance Minister Manuel 
Hinds, El Salvador's economic growth has been close to 6% 
per year over the last several years, not the 2-4 % 
officially reported.  The Saca Administration, which Hinds 
calls the "most corrupt" in El Salvador's history, has 
intentionally been understating growth for political motives. 
 Fearing the current government's "cheap populism," Hinds 
speculated that ARENA candidate Rodrigo Avila's high 
negatives will make an ARENA victory difficult and stated 
that, if Mauricio Funes actually controls the FMLN, a 
"centrist" FMLN victory would be "one of the best things to 
ever happen to the country."  Hinds also discussed problems 
in energy and mining, and their negative effects on El 
Salvador's investment climate.  END SUMMARY. 
 
¶2. (SBU) EconCouns and Econoff discussed the state of the 
economy, the current government, energy issues, and the 2009 
elections with former Finance Minister Manuel Enrique Hinds 
on April 16.  Hinds, a two-time Minister of Finance 
(1979-1980, 1995-1999), now works as a private sector 
consultant and political commentator. 
 
 
ECONOMIC GROWTH UNDERSTATED 
--------------------------- 
 
¶3. (SBU) In Hinds view, official statistics significantly 
understate El Salvador's economic growth over the past 
decade.  Hinds believes there are two problems with current 
measurements.  First, the indices for measuring economic 
growth are based on an economic census completed in 1990. 
Certain sectors in the modern economy, like fast food and 
services, are either missing or significantly underweighted. 
Hinds estimated that, using a more realistic measure of 
activity, growth would have been about 6% per year over the 
last several years.  Likewise, the latest population census 
(which are public though still not official) indicated that 
El Salvador has about a million fewer people than previously 
estimated.  The lower population figure would, he said, boost 
per capita GDP growth considerably even under the old index. 
 
¶4. (C) Hinds added that the government has calculated growth 
figures based on a more accurate economic survey, but the 
administration won't release the numbers for political 
reasons.  He stated that forme Technical Secretary (Chief of 
Staff to the Presdent) Eduardo Zablah told him that better 
growthfigures would have imperiled El Salvador's chances or 
receiving a Millennium Challenge Compact.  Siilarly, if the 
government used the new, lower poulation estimate, El 
Salvador's crime statistics would look even worse. 
 
¶5. (C) In the short-term, Hinds thought the biggest economic 
risk was inflation, especially food prices.  Price increases 
in El Salvador are being driven by external factors, like 
world commodity prices and problems in the U.S. economy. 
Hinds expected prices to remain high for at least two to five 
years, and said there was little anyone could do about it. 
He expressed concern over government statements about 
becoming more involved in the agricultural sector, including 
buying farmland in other countries, and feared that this 
could lead to export controls and a market-distorting 
situation "similar to Argentina." 
 
 
POLITICAL PARTIES HEADED IN VERY DIFFERENT DIRECTIONS 
--------------------------------------------- -------- 
 
¶6. (C) According to Hinds, the Saca Administration was now 
the "most corrupt" in the history of El Salvador, "surpassing 
even the Duarte Administration in the 1980s."  The government 
was now adopting "cheap populism" in an effort to pander to 
voters and was actively undoing the 
"good work" of the three previous ARENA administrations. 
Their current, short-sighted policies were "set to explode" 
soon after the new President takes office in June 2009. 
Hinds particularly faulted the government's subsidies for the 
transportation sector, which "aren't even popular."  He 
estimated that the government was spending about $400 million 
on subsidies, money which had been diverted from longer term 
infrastructure investment. 
¶7. (C) Turning to the election, Hinds said that the FMLN now 
appeared to be "the centrist party," while ARENA was trying 
to be the "populist" party.  He stated that an FMLN victory, 
"if Mauricio Funes actually controls the party," would be 
"the best thing to ever happen to the country," 
since it would enshrine pro-investment policies "like what 
happened in Chile."  He was concerned, however, that he did 
not see a "coalition for Funes within the FMLN."  If Funes 
made statements against Castro and Chavez, who are "not 
popular in El Salvador," it would be a sign that he was in 
 
charge, but that hadn't happened yet.  (Comment.  However, 
Funes may be biding his time while he gathers support for his 
"Friends of Mauricio" movement.  He has still not become a 
member of the FMLN party and could threaten to withdraw his 
name from the FMLN ticket at the last minute, leaving the 
FMLN high and dry if the old guard FMLN does not support his 
policies and Funes free to run under the banner of another 
party. End Comment.) 
 
¶8. (C) Hinds described ARENA candidate Rodrigo Avila, with 
whom he had worked in the 1990s, as "honest and a nice guy" 
but by no means the best candidate that ARENA could have 
chosen.  He noted an "El Diario de Hoy" poll comparing Funes 
and Avila on 15 different criteria.  The only measure that 
Avila, the former Chief of Police, came out ahead of Funes 
was on crime.  Even on the security criterion, Hinds had his 
doubts given the poor security situation in the country. 
Hinds said that President Saca was now "so vain he thinks he 
could win any election" by making it about him.  Hinds 
pointed, however, to another part of the "El Diario de Hoy," 
poll where 50.1 percent of respondents said they would never 
vote for Avila.  In the 
elections of Calderon Sol and Saca, Hinds said, the ARENA 
candidates at their lowest rankings had only a 32 percent "no 
vote" and both won with about 68 percent.  Hinds asserts 
that, using that same correlation, Avila would end up with 
only 49.9% of the vote. 
 
ENERGY CRISIS LOOMING 
--------------------- 
 
¶9. (C) Discussing the energy sector, Hinds predicted a power 
crisis soon after June 2009.  Electricity demand continues to 
rise, but there has been no significant investment in new 
power generation facilities, which take years to build. 
Hinds complained of legal impediments encountered by one of 
his consulting clients Cutuco Energy, which plans to supply 
natural gas and generate electricity for the Central American 
regional market.  The hydrocarbons law, however, does not 
allow for the offloading of natural gas that is only 99 and 
not 100 percent pure.  What should have been a simple change 
in the law, he said, had now dragged on for four years.  The 
government, he added, was also concerned about Cutuco getting 
a monopoly in gas transmission, an issue "that countless 
other countries have already worked out."  He commented that 
problems faced by an Italian firm trying 
enforce its contractual provisions for majority ownership of 
a joint venture geothermal project with the state 
hydroelectricity company, CEL, didn't just affect power 
generation but also threatened El Salvador's investment 
climate. 
 
¶10. (C) Hinds dismissed recent government statements about 
developing possible offshore oil and gas reserves.  He said 
those supposed resources "have been discussed since (he) was 
a child," noting that the current negotiations are being 
conducted by Saca's family and friends (Note. CEL is the 
official entity responsible for those negotiations and one of 
the parties involved in the latest venture is the son of the 
President of CEL.  This has raised obvious conflict of issues 
problems, which have been raised with CEL's Board. End note.) 
 
 
MINING - GOLDEN OPPORTUNITY GOING TO WASTE 
------------------------------------------ 
 
¶11. (C) Hinds had also worked as a consultant to the mining 
industry, and he authored a study rebutting opponents' 
claims that mines were only found in unpopulated areas, 
citing Santiago, Chile and some cities in Canada as 
counter-examples.  His report also said the benefits of 
mining outweighed the environmental risks, which he said was 
minimal due to the high environmental standards his client 
Pacific Rim Mining planned to use.  Hinds stated that Pacific 
Rim Mining had invested about $25 million and "followed the 
rules" for both exploration and exploitation, only to be 
denied permits.  Again, this would also damage prospects for 
future investment.  He added that it was a mistake for the 
government to block gold mining in general, since "gold is 
the best hedge against oil prices" and "we're wasting our 
resources." 
 
COMMENT 
------- 
 
¶12. (C) Hinds is a respected former finance minister, now out 
of politics, and a comparatively unbiased observer.  His 
comments reflect his discontent with the Saca Administration 
and Avila's candidacy.  A sentiment that we hear is shared by 
many others within ARENA. 
BUTLER