Economic Studies
El Salvador

El Salvador

Population 6.4 million
GDP per capita 3,692 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2013  2014 2015 (f)  2016 (f)
GDP growth (%) 1.8 2.0 2.4 2.5
Inflation (yearly average) (%) 0.8 1.1 -0.9 1.2 
Budget balance (% GDP)  -3.7 -3.4 -4.1 -4.5 
Current account balance (% GDP) -6.5 -4.7 -2.6 -2.9 
Public debt (% GDP) 55.3 56.8 59.8 62.1 

 

(e) Estimate (f) Forecast

STRENGTHS

  • Relative economic diversification
  • “Dollarised” economy since 2001
  • Free trade agreements with Central America and the United States (CAFTA-DR), as well as with Mexico and the EU
  • Financial support from multilateral institutions
  • Growing population

WEAKNESSES

  • High level of criminality and insecurity associated with drug trafficking
  • Lack of natural resources
  • Climatic and seismic vulnerability
  • Inadequate infrastructures and investment
  • Dependence on the United States (46% of exports, 90% of immigrant workers' remittances and FDI)
  • Structural fragility of public and external accounts
  • Significant inequality and poverty

Risk assessment

Weak growth potential

The country continues to have the weakest rate of growth in Central America. This was boosted in 2015 by the upturn in North America but was negatively affected by a major drought. It remains too small to drive productivity up and increase the attractiveness of the country (lowest recipient of FDI in the region). In 2016, the upturn in growth in the United States will enable foreign trade and household consumption, benefiting in part from higher remittances from expatriates (where almost a third of the population live), to make a positive contribution to growth. Demand will however continue to suffer from enduring inequalities. Private investment will continue to be held back by the low level of household purchasing power, the lack of natural resources as well as the upsurge in criminality which is causing deterioration in the business climate. These factors as well as the restrictive budgetary measures are likely to keep growth at a lowly level in 2016.   In terms of sectors, most of the growth will come from the vitality within the manufacturing industry (textile), agriculture (sugar, coffee) as well as financial services. The construction sector is likely to struggle because of the weak levels of investment in housing and the lack of large-scale projects.

Inflation should remain low in 2016 under the hypothesis of a stabilisation of commodity prices and lower inflationary pressures associated with weak domestic demand. This outcome is conditional on the absence of any major climate related event, to which the country is exposed, that could lead to higher prices on the domestic market.

 

Difficult budgetary consolidation and external accounts that remain vulnerable

Without a majority in Congress, the government of S. Sánchez Cerén is struggling to apply the reforms needed to reduce the budget deficit. The burden of public expenditure will continue to increase in 2016, under the impact in particular of subsidies (energy, agriculture, pensions) and the measures to bring an end to urban violence. The ability of the government to increase its revenues through taxes will suffer because of the weak rate of growth. In order to alleviate pressure on the budget deficit, the government will continue to raising funds through the international markets with the aim of repaying the more costly Treasury Bills, known aslètes. As it needs the support of multilateral institutions to finance its social programs, the new government is obliged to persist with its aim of reducing public expenditure, but its room for manoeuvre remains limited by the lack of a majority.

The persistence of this deficit is driving up public debt which has reached worrying levels for a dollarised economy.

The US economic recovery is likely to boost exports and remittances from expatriates (17.5% of GDP), with 90% coming from the United States. The weak level of domestic demand and oil prices will make it possible to keep imports at a low level. However, the balance of services could suffer from a downturn in tourism as a result of the resurgence of violence. This could also impact on FDI flows, already at very low levels (less than 2% of GDP) and thus preventing any improvement in the current account balance.

 

Governance suffering with lack of legislative majority and resurgence of violence

In power since June 2014, former guerilla chief and President, Salvador Sánchez Cerén of theFrente Farafundo Martí para la Liberación Nacional(FMLN) is facing significant problems, including budgetary weaknesses and public insecurity. The FMLN did not win a majority on Congress in the March 2015 legislative elections and this is complicating governance. It is holding back the budgetary consolidation reform process and threatens legislative paralysis until the next elections in 2018. Already being accused of high levels of corruption and nepotism, the government is losing support among the population for its inability to bring the rising violence under control. Following an effective truce in 2012, murders linked with the country’s two main gangs (maras) are increasing and putting Salvador as the most violent country in the world in 2015 (92 murders per 100,000 inhabitants). In fighting this, the National Security Council (CNSCC) launched aPlan d’El Salvador Seguroin July but given the high cost of 2.1 billion dollars, there are doubts as to whether it will be effectively implemented in the light of the country’s current budgetary difficulties. The business climate has thus significantly worsened.

Although FMLN has historic links with the radical left regimes in the region, the President works to maintain good relations with the United States, the country’s leading trading partner and essential in continuing its social development, and in particular with the funding of the Millennium Challenge Corporation (MCC) in fight against poverty.

 

Last update : January 2016

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