Country Report El Salvador May 2009

Summary

Mauricio Funes of the left-wing Frente Farabundo Marti para la Liberacion (FMLN) will assume office in June 2009.
Mr Funes faces major challenges, including lacking a legislative majority, the FMLN's long history of division and radicalism. An antagonistic media and private sector could also prove serious obstacles.
Policy implementation under the Funes government will be complicated by its lack of a congressional 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 (down from 1% previously), reflecting a deteriorating external environment. Assuming a mild US recovery, GDP will recover to 1.7% in 2010.
After falling to 3.3% in February from a peak of 9.9% in August 2008, we now expect that inflation will ease to 2.6% by end-2009 and 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.

Mr Funes has given the first indications of his cabinet make-up and the balance between former guerrillas and non-guerrillas, a trend likely to be replicated across the new administration.
The expulsion of a deputy from the Partido de Conciliacion Nacional (PCN), the third-largest party in Congress, will alter the terms of governability, possibly producing more consensus-driven legislation.
Lower fiscal revenue and rising spending in January-February caused the fiscal balance to move into the red from a surplus in the year-earlier period.
Commercial interest rates rose further in March, reflecting banking nervousness over the local downturn, as well as its exposure to the US financial markets, where most banks cover their own lending requirements.
Central Bank indicators for economic activity and external trade showed how the downturn continued to spread in early 2009 after the slowdown in GDP in the fourth quarter.

This report covers the following industry codes:
SIC Code: 48;10;15
NAICS Code: 517;212;23