C O N F I D E N T I A L SAN SALVADOR 000480
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)
Â¶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.
Â¶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
Â¶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.
Â¶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.
Â¶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
Â¶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
Â¶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.)
Â¶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
Â¶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
Â¶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
Â¶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
Â¶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.