Economic Analysis
El Salvador

El Salvador

Population 6,127 million
GDP per capita 4 219 US$
C
Country risk assessment
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Synthesis

major macro economic indicators

   2014 2015  2016 (e) 2017 (f)
GDP growth (%) 1.4 2.5 2.4 2.4
Inflation (yearly average) (%) 1.1 -0.7 1.0  1.5
Budget balance (% GDP) -3.4 -3.2 -3.5 -3.9
Current account balance (% GDP) -5.2 -3.6 -2.1 -2.9
Public debt (% GDP) 57.1 58.7 60.4 62.0

 

(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
  • 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 (47% of exports, 90% of remittances and FDI)
  • Structural fragility of public and external accounts
  • Significant inequality and poverty

Risk assessment

Growth suffering in negative operational climate

The country continues to have the weakest rate of growth in Central America. The rate of growth slowed in 2016, mirroring the US economy, with which it is closely correlated. Growth remains too weak to sustain the productivity and attractiveness of the country (least popular FDI destination in the region). In 2017, foreign trade and household consumption are expected to benefit from increased remittances from workers abroad, once again making a positive contribution to growth. This will nevertheless remain at a fairly moderate pace. The level of criminality, by discouraging investors and undermining consumer confidence, is effectively restricting the country’s economic growth rate. The limited purchasing power of households and the lack of natural resources, together with the level of corruption, will also continue to limit private investment. In addition to these factors there is also the ongoing measures to balance the budget that are hampering growth. In terms of sectors, growth is likely to be sustained, as in 2016, by manufacturing and agricultural production.
Inflation is also expected to increase slightly given the hypothesis of a moderate rise in commodities prices. It will however remain at a relatively low level under the impact of very weak domestic demand.

 

Budgetary consolidation blocked by political dissension

With the budget deficit remaining at 3% in 2016, the country’s situation remains fragile. Political disagreements between the government of President S. Sánchez Cerén (FMLN) and the Legislative Assembly, where his party only holds 31 out of the 84 seats, are blocking the reforms needed to help reduce the budget deficit. The FMLN has proven reluctant to adopt the budget consolidation favoured by ARENA (Alianza Republicana Nacionalista) which would be at the expense of the social programs and pensions, which account for more than half of the budget. Public spending will continue to increase in 2017, propelled in particular by subsidies (energy, agriculture and pensions) and the measures aimed at countering the gang violence. Given the slow growth rate and the weakness of investments, the possibility for the government of using its fiscal options to increase revenues is limited. In trying to relieve the pressure on the budget deficit, the government will continue making use of funds raised on the international markets for the purpose of repaying short-term Treasury Bills (LETES). Without a majority, the government has only limited room for manoeuvre in trying to balance the budget. It is however possible that a short-term political consensus could be reached between FMLN and ARENA. In the longer term, the perpetuation of the deficit will lead to an ever-increasing level of public debt beyond 60%, a level that is worrying for a dollarized economy.
Despite the improvement in the current account balance, thanks mainly to the low price of crude oil, the deficit is expected to widen in 2017. The country’s exports, reliant as they are on the health of the US economy, are not likely to grow significantly in 2017. At the same time, the expected rise in oil prices will have an impact on imports: the balance of trade is therefore likely to remain in deficit. The current account balance is also suffering because of the level of criminality which is deterring FDI. Remittances from the El Salvador diaspora (17% of GDP) will however help to limit the size of the current account deficit.

 

Governance hindered by the lack of a legislative majority and criminality

Salvador Sánchez Cerén (FMLN), elected President in June 2014, faces a number of challenges including budget consolidation and restoring security within the country. The President however is unable to call on support from a majority in the Assembly following the victory of ARENA in the general elections. This situation is preventing the urgently needed reforms, budget consolidation and raising fears of legislative paralysis ahead of 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’ two biggest gangs (Mara-18 and Mara Salvatrucha) have been on the rise with the result that El Salvador was the most violent country in the world in 2016 (104 murders per 100,000 inhabitants), according to the World Economic Forum. As a result, in 2015, on the initiative of the President, the national security council (CNSCC) launched its Plan El Salvador Seguro but because of its high cost there are doubts on its effective implementation in the light of the country’s budget problems. A Trinational Force (Fuerza de Tarea Trinacional) was also launched, along with Guatemala and Honduras, in November 2016 to fight against organized crime in the region. The business climate has deteriorated significantly as a result. In 2016, the President announced the introduction of new extraordinary measures including the immediate application of a state of emergency in the seven prisons holding the majority of the imprisoned gang members.
Although the FMLN maintains historic links with radical left regimes in the region, the President is careful to maintain good relations with the United States, the country’s leading trading partner.

 

Last update : January 2017

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