Country Report El Salvador July 2008

Outlook for 2008-09

• The political focus has shifted to the presidential campaign which pits Rodrigo Avila of the ruling Alianza Republicana Nacionalista (Arena) against the moderate Mauricio Funes of the Frente Farabundo Marti para la Liberacion Nacional (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 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 10% in 2008 owing to upward pressure from high oil and food prices, before easing to 6.5% in 2009.
• The current-account deficit will widen to over 7% of GDP in 2008 before easing to 6.6% of GDP in 2009. It will largely be financed by foreign direct investment (FDI) and long-term debt inflows.

Monthly review

• Two May polls have shown that Mr Saca's popularity has fallen in recent months owing to the worsening economic situation, with 80% claiming they are worse off than one year ago.
• This is affecting both Arena's ratings and Mr Avila, who is trailing Mr Funes in the polls and who will no longer be able to rely upon the incumbent's former high popularity ratings.
• With more than 20% of voters undecided the March 2009 presidential election remains wide open, although the legislative and municipal elections due to take place in January 2009 will give an indication of voter intentions.
• The non-financial public sector remained in surplus in January-April thanks to a 12% rise in tax revenue.
• The government expects to meet the cost of a doubling of the fuel subsidy for public transport and rises in public sector wages by a tax on international phone calls, but if phone traffic drops there would be a revenue shortfall.
• Exports thundered ahead in January-April thanks to a continued strong performance from non-traditional exports and a sharp recovery in maquila exports, which rose at double-digit rates for the first time since 2000.
• Falling import volumes of consumer and capital goods could herald the first signs of slowing domestic demand.

Source: Country Report