Country Report El Salvador March 2009

Summary

A presidential election that will determine the political and economic environment for the next five years takes place on March 15th.
Our baseline forecast is premised on an Arena victory following a second-round run-off votethe presidential contest pits Rodrigo Avila of the ruling Arena against Mauricio Funes from the moderate wing 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% 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 6.8% 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.

The smaller right-wing, centre-right and centre-left parties abandoned their presidential ambitions in February and threw their weight behind the two main front-runners.
The presidential contest has therefore become a straight race between MrAvila and Mr Funes. The candidates are in a statistical tie according to most polls.
The high cost of energy subsidies, a mid-year public-sector salary rise and rapidly decelerating economic growth caused a sharp deterioration in the public finances in 2008.
Inflation has eased steadily since reaching a high of 9.9% in August 2009. Twelve-month inflation had eased to 4% in January, the lowest rate recorded in over a year, and among the lowest registered in Latin America.
Private credit growth rose by just 3.5% in 2008, compared with 9.8% in 2007, as the global liquidity squeeze affects El Salvador's foreign-owned banks.

Source: Country Report

This report covers the following industry codes:
SIC Code: 48;10;60;49;80;53
NAICS Code: 517;212;11;52;22;62;44