Country Report El Salvador February 2009

Outlook for 2009-10

• Politics are moving into the crucial pre-electoral stage, with a presidential election that will determine the political and economic environment for the next five years taking place in March 2009.
• The Economist Intelligence Unit’s baseline forecast is premised on an Arena victory—the March presidential contest pits Rodrigo Avila of the ruling Arena against the moderate Mauricio Funes of the leftist FMLN.
• Whichever candidate wins, policy implementation under the next government, which takes office in June, will be complicated by its lack of a congressional majority.
• 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 decelerate to 1.1% in 2009 (down from 1.5% previously), reflecting a deteriorating external environment. Assuming a mild US recovery, GDP will recover gradually to 1.9% in 2010.
• After falling to 5.5% at end-2008 from a peak of 9.9% in August 2008, we now expect that inflation will ease to 2.5% by end-2009 and 3% in 2010.
• After widening to 6.7% of GDP in 2008, the current-account deficit will narrow sharply. We expect that it will be largely financed by long-term debt inflows as FDI inflows will weaken substantially in 2009.

Monthly review

• As expected, neither of the two major parties, Arena or the FMLN, won a majority in the January legislative elections. But the FMLN did manage to regain the position of largest party in the legislature.
• Arena struck an important and symbolic blow at the FMLN by winning back the mayoralty of San Salvador, the capital. It will give the party high visibility ahead of the presidential poll on March 15th.
• Industrialists have called for more government measures to help their sector, including raising import duties.
• The Central Bank has been using IDB funds to inject liquidity in the banking system and restart credit lines to industry.
• The high cost of imported oil during the first half of 2008 was the most important factor in the 10% deterioration in the trade deficit in 2008.
• According to the BCR, Hispanic unemployment in the US rose to 9.2% in late 2008. This was reflected in remittances, which fell consistently in the last three months of 2008.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52