Country Report El Salvador April 2009

Summary

Mauricio Funes of the left-wing Frente Farabundo Marti para la Liberacion (FMLN) will assume office in June.
Mr Funes faces major challenges, including lacking a legislative majority, the FMLN's long history of division and radicalism. An antagonistic media and private sector could also prove serious obstacles.
Policy implementation under the Funes government will be complicated by its lack of a congressional majority and a strong opposition from the outgoing Alianza Republicana Nacionalista (Arena), the second-largest legislative party.
The deep recession in the US, El Salvador's most important trading and investment partner, will drag GDP growth down in El Salvador and its Central American trading partners.
GDP growth will contract by 1% in 2009 (down from 1% growth previously), reflecting a deteriorating external environment. Assuming a mild US recovery, GDP will recover to 1.9% in 2010.
After falling to 3.3% in February from a peak of 9.9% in August 2008, we now expect that inflation will ease to 2% by end-2009 and 2.2% by end-2010.
After widening to over 7% of GDP in 2008, the current-account deficit will narrow sharply in 2009. It will be largely financed by long-term debt inflows as foreign direct investment inflows will weaken substantially.

In a historic victory at the March 15th presidential poll, a former television journalist, Mauricio Funes, ended 20 years of rule by the conservative Arena, ushering in El Salvadors first-ever left-wing administration in June.
In a largely incident-free day of voting, Mr Funes beat a former police chief, Rodrigo Avila, by 2 percentage points, with 51%. Arena promised a robust opposition to the FMLN government.
Initially, the new administration was expected to pursue the current governments strategy of trying to stimulate the economy while protecting some of its most vulnerable parts from further deterioration.
Mr Funes has also promised an immediate outlay of extra public funds on key social programmes, including Red Solidaria, a rural scheme that he has pledged to expand to urban areas.
Exernal data for the first two months of 2009 show the impact of the sharp global downturn on El Salvador. Maquila (offshore assembly for re-export) exports fell by 20% and maquila imports fell at an even faster pace, by 40%.

Source: Country Report