Country Report El Salvador August 2008

Outlook for 2008-09

• The political focus has shifted to the presidential campaign, which pits Rodrigo Avila of the ruling Arena against the moderate Mauricio Funes of the FMLN.
• As a result, governability has become more difficult and policy implementation is slowing. The president, Antonio Saca, will continue to rely on negotiation to implement his policies, as no party has a simple majority.
• A difficult external environment will drive GDP growth down from late-2008. Growth will slow further in 2008 and 2009 on the back of decelerating consumer and investment spending.
• After reaching 4.9% at end-2007 inflation will rise to 10% in 2008 owing to upward pressure from high oil and food prices, before easing to 7% in 2009.
• The current-account deficit will widen to over 7% of GDP in the outlook period. It will largely be financed by foreign direct investment (FDI) and long-term debt inflows.

Monthly review

• The PCN, on which Arena has relied to pass legislation has distanced itself from the ruling party ahead of the 2009 elections to present an alternative right-wing party to voters.
• The PCN's more independent position signals that legislative business will be further stalled by the approaching electoral campaign.
• A UNDP report highlighted the problem of underemployment in El Salvador and called upon the next government to work with the employers’ organisations and unions to improve job prospects.
• The government has rejected an opposition motion to regulate the petrol market. The government also eliminated a business energy subsidy to help low-income groups.
• Strong first-quarter GDP growth data masked a quarter-on-quarter slowdown with manufacturing, commerce and housing activity all falling between the fourth and first quarters.
• As in April, the activity index in May showed that the economy, although still buoyant, was slowing. This underpins our forecast of slower growth for 2008 as a whole.
• Despite accelerating export earnings, the trade accounts also showed signs of the forthcoming economic slowdown, with import volumes of consumer durables and capital goods contracting.