Country Report El Salvador

Outlook for 2008-09

• The presidential campaign commenced in earnest in March when Arena selected Rodrigo Avila as its candidate. He will face the FMLN's moderate candidate, Mauricio Funes, who has been performing well in the polls.
• As a result of the shift in the political focus onto the 2009 presidential election, governability has become more difficult and policy implementation will start to slow.
• Mr Saca will continue to rely on negotiation and compromise to implement his policy agenda, as no party has a simple majority in Congress.
• A difficult external environment will drive GDP growth down from mid-2008. Growth will slow further in 2009 on the back of decelerating consumer and investment spending.
• After reaching 4.9% at end-2007 inflation will rise to 6.6% in 2008 owing to upward pressure on oil and food prices. Inflation will ease to 6.1% in 2009.
• The current-account deficit will widen to 6.8% of GDP in 2008 and 7.2% of GDP in 2009. It will largely be financed by FDI and long-term debt inflows.

Monthly review

• Statistics from the state forensic office revealed that there were 795 recorded homicides during the first quarter of 2008, down from 890 a year earlier. Officials attributed the fall to gains made in fighting violent street gangs.
• Reports emerged about alleged links between the FMLN and the FARC prior to 2003, following the seizure of a FARC computer during a raid by the Colombian military in April.
• Data released from the 2007 census revealed that the population is much lower than the government had estimated, owing to underestimated levels of emigration. As per-head GDP is now higher, this could affect access to concessional financing.
• Inflation continued to rise in April, to 6.8% year on year, on the back of rising oil and food prices. Government measures to reduce the fiscal stimulus are unlikely to reduce imported inflationary pressures significantly.
• The index of economic activity rose at a solid pace in January-February. However, the Central Bank’s decision to downgrade GDP growth expectations for 2008 from 5% to 4% indicates that the effects of the US slowdown will be felt later in the year.

SOURCE: Country Report