Country Report El Salvador September 2008

Outlook for 2008-09

• The political focus has shifted to the March 2009 presidential contest, which pits Rodrigo Avila of the ruling Arena against the moderate Mauricio Funes of the leftist FMLN. As a result, policymaking will slow.
• Our baseline forecast is premised on an Arena victory but whichever candidate wins, policy implementation under the next government, which takes office in June 2009, will become more complicated.
• The government will remain committed to free trade, the promotion of foreign investment in key industries, such as maquila (offshore assembly for re-export), and maintaining a tax regime that promotes corporate investment.
• GDP growth will decelerate to 3.5% in 2008, and slow further to 2.5% in 2009, after expanding by 4.7% in 2007, reflecting a deteriorating external environment and the impact on consumption of higher inflation.
• After reaching 4.9% at end-2007 we expect that inflation will move above 10% in the short term before starting to ease towards year-end and into 2009, when we expect it to end the year at 7%.
• The current-account deficit will widen to 6% of GDP in 2008 and 6.2% in 2009. We expect that it will largely be financed by FDI and long-term debt inflows.

Monthly review

• Mr Funes published a party programme aimed at reassuring investors and voters that, under an FMLN government, dollarisation will not be abandoned, trade agreements will be adhered to and all debt obligations will be honoured.
• Two recent polls showed that Mr Avila had narrowed Mr Funes's lead, reflecting relentless campaigning, a heavy media presence and rising concerns over alleged links between the FMLN and Colombia's FARC guerrillas.
• The rising cost of energy subsidies and the consequent build-up of short term domestic debt could prompt Arena and the FMLN to negotiate the possibility of longer-term international financing.
• A contraction in durable consumer goods imports in the first half of 2008 and in imports of capital goods equipment for transport and utilities signalled that a slowdown in consumption and investment is on the cards.
• Workers' remittances remained surprisingly resilient in the first half of 2008, rising by 6%, at a similar pace to that in 2007. The diversification of Salvadoran employment may have delayed the full impact of the US downturn.

Source: Country Report