Economic Studies
El Salvador

El Salvador

Population 6.4 million
GDP per capita 3,895 US$
C
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 2.4 2.3 2.3 2.3
Inflation (yearly average, %) 0.6 1.0 1.7 1.9
Budget balance (% GDP) -3.4 -2.5 -2.2 -2.7
Current account balance (% GDP) -2.2 -2.5 -3.4 -3.4
Public debt (% GDP) 69.5 70.6 70.1 70.3

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Relative economic diversification
  • Free trade agreements with Central America and the United States (CAFTA-DR), as well as with Mexico and the EU; entry into the customs union with Guatemala and Honduras
  • Financial support from multilateral institutions
  • Strong demographics

WEAKNESSES

  • High crime and insecurity linked to drug trafficking
  • Lack of natural resources
  • Climate and seismic vulnerability
  • Inadequate infrastructure and investment
  • Dependence on the United States (48% of exports)
  • Structural fragility of public and external accounts
  • Significant inequalities and poverty

Risk assessment

Structural obstacles to growth

In 2019, El Salvador’s growth is set to continue to be the lowest among Central American countries, constrained by a lack of investment and the need for structural reforms. The vitality of activity in the United States will support exports, particularly textiles and clothing, but also electronic components (cables, chips). The decrease in unemployment among the Latin American community in the United States will support the sending of remittances from the 2 million Salvadoran immigrants to the United States (20% of the country’s population), supporting domestic demand. The end of the TPS (Temporary Protected Status), decided by the Trump administration (due in September 2019), should have limited consequences on foreign exchange flows, as only 200,000 migrants are concerned, and a significant proportion should be regularised. However, a potential tightening of US migration policy could pose a risk to the Salvadoran economy, which is highly dependent on these currency flows (18% of GDP). Private consumption will also be boosted by low inflation, contained by the total dollarisation of the economy. On the supply side, the agricultural sector will continue to be characterized by poor performance in a context of low sugar and coffee prices (the country’s main agricultural product). Private investment will likely remain very insufficient, constrained by a significantly high crime rate and a still deficient business environment, despite recent progress. The maquilas, production areas dedicated to exports, will continue to concentrate the bulk of foreign investment and manufacturing production, particularly in the textile and clothing sector.

Fragile fiscal and external situations

Despite recent fiscal adjustments that generated a primary surplus in 2017 and 2018, interest payments on debt are expected to further weaken the public accounts in 2019. Savings from the 2017 pension reform are not expected to increase revenues substantially in the absence of further reforms, delayed by the lack of agreement between political parties. After a partial default on its debt in early 2017, the country faced further difficulties in autumn 2018 in financing the payment of interest due in 2019: the majority opposition in Parliament has blocked the government’s desired bond issue in the absence of further budgetary reforms. The legislative deadlock is expected to continue until the end of the current President’s term in June 2019. In this context, public debt (including the debt of non-financial public companies), is expected to increase slightly. Its relatively high level presents a risk in the context of a fully dollarised economy like El Salvador.

On the external accounts side, the current account deficit is expected to remain stable compared to 2018. The trade balance will remain in deficit (-20% of GDP) due to the dynamism of imports of intermediate goods (particularly those dedicated to the textile sector). The income balance deficit will likely further widen with the repatriation of dividends from foreign companies in a context of rising key rates in the United States. The growth in discount flows, which is less dynamic than in the past, should only partially offset these deficits. FDI will still be insufficient to balance this need for external financing. The government is therefore likely to use market-based financing through bond issuance and international donors.

Towards the end of a political blockade?

In power since 2014, President Salvador Sanchez Cerén (Frente Farabundo Marti para la Liberacion nacional, FMLN) is currently enduring a low level of popular support due to the high crime rate in the country and the lack of a real project to fight poverty. In the March 2018 parliamentary elections, the opposition party (Arena) won the majority of seats in parliament, leading to a situation of legislative deadlock, preventing any reform. Given this difficult political context for the FMLN, the February 2019 presidential battle will mostly oppose Carlos Calleja, Arena’s candidate, and Nayib Bukele, from the Gran Alianza por la Unidad Nacional (GANA) party. A victory from Bukele would be a major break from the historical bipartisanship of the Salvadoran political system. Regardless of the winner, the next president will have to face the challenges of fighting crime and corruption, as well as addressing migratory and poverty issues.

From the point of view of diplomatic relations, beyond the leading partnership with the United States, El Salvador’s foreign policy remains oriented towards the sub-region with the entry, in 2018, into the customs union formed by Guatemala and Honduras. A rapprochement with China was also initiated following the end of diplomatic relations with Taiwan in August 2018 and a stated desire to increase economic cooperation between the two countries.

 

Last update : February 2019

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