Country Report El Salvador June 2009

Outlook for 2009-10

• Mauricio Funes of the left-wing Frente Farabundo Marti para la Liberacion (FMLN) will assume office on June 1st 2009.
• Mr Funes faces major challenges, complicated by the lack of a legislative 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 2% in 2009, reflecting a difficult external environment. Assuming a mild US recovery, GDP will recover to 1.5% in 2010.
• After falling to 2.3% in April from a peak of 9.9% in August 2008, we now expect that inflation will ease to 2% by end-2009 and rise to 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.

Monthly review

• Protests that held up the inauguration of the new legislature on May 1st could be indicative of a new political dynamic in El Salvador.
• There were positive signs that the Funes administration would continue to work closely with the US, El Salvador's main trading and investment partner.
• The president-elect has attended meetings with the multilaterals who all urged fiscal restraint to deal with the fall in tax revenue owing to the economic slowdown.
• The incoming government is considering a pacto fiscal, a broad fiscal approach that implies a restructuring of the tax system to generate morerevenue.
• External trade data for the first four months of 2009 reveal the fuller impact of the global crisis on El Salvador with export earnings falling by 15% and import spending by 27%.
• Workers' remittances fell by 9% in the first four months of 2009 as rising unemployment of Salvadoran workers in the US hits their ability to send money back.