Economic analysis
El Salvador

El Salvador

Population 6.4 million
GDP per capita 3,895 US$
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 2.4 2.3 2.3 2.3
Inflation (yearly average, %) 0.6 1.0 1.7 1.9
Budget balance (% GDP) -3.4 -2.5 -2.2 -2.7
Current account balance (% GDP) -2.2 -2.5 -3.4 -3.4
Public debt (% GDP) 69.5 70.6 70.1 70.3

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Relative economic diversification
  • Free trade agreements with Central America and the United States (CAFTA-DR), as well as with Mexico and the EU entry into the customs union with Guatemala and Honduras
  • Financial support from multilateral institutions
  • Strong demographics

WEAKNESSES

  • High crime and insecurity linked to drug trafficking
  • Lack of natural resources
  • Climate and seismic vulnerability
  • Inadequate infrastructure and investment
  • Dependence on the United States (48% of exports)
  • Structural fragility of public and external accounts
  • Significant inequalities and poverty

Risk assessment

Structural obstacles to growth

In 2019, El Salvador's growth is set to continue to be the lowest among Central American countries, constrained by a lack of investment and the need for structural reforms. The vitality of activity in the United States will support exports, particularly textiles and clothing, but also electronic components (cables, chips). The decrease in unemployment among the Latin American community in the United States will support the sending of remittances from the 2 million Salvadoran immigrants to the United States (20% of the country's population), supporting domestic demand. However, the tightening of US migration policy since the beginning of 2019 represents a risk for the Salvadoran economy, given its high dependence on these currency flows (18% of GDP).Private consumption will also be boosted by low inflation, contained by the total dollarisation of the economy. On the supply side, the agricultural sector will continue to be characterized by poor performance in a context of low sugar and coffee prices (the country's main agricultural product). Private investment will likely remain very insufficient, constrained by a significantly high crime rate and a still deficient business environment, despite recent progress. Themaquilas, production areas dedicated to exports, will continue to concentrate the bulk of foreign investment and manufacturing production, particularly in the textile and clothing sector.

 

Fragile fiscal and external situations

Despite recent fiscal adjustments that generated a primary surplus in 2017 and 2018, interest payments on debt are expected to further weaken the public accounts in 2019. Savings from the 2017 pension reform are not expected to increase revenues substantially in the absence of further reforms, delayed by the lack of agreement between political parties. After a partial default on its debt in early 2017, the country faced further difficulties in autumn 2018 in financing the payment of interest due in 2019: the majority opposition in Parliament blocked the government's desired bond issue in the absence of further budgetary reforms. The end of this legislative deadlock remains uncertain given the minority position of the new president in parliament. In this context, public debt (including the debt of non-financial public companies)is expected to increase slightly. Its relatively high level presents a risk in the context of a fully dollarised economy like El Salvador.

On the external accounts side, the current account deficit is expected to remain stable compared to 2018. The trade balance will remain in deficit (-20% of GDP) due to the dynamism of imports of intermediate goods (particularly those dedicated to the textile sector). The income balance deficit will likely widen further with the repatriation of dividends from foreign companies. The growth in discount flows, which is less dynamic than in the past, should only partially offset these deficits. FDI will still be insufficient to balance this need for external financing. The government is therefore likely to usemarket-based financing through bond issuance and international donors.

 

Can Bukele really implement the change he promised?

Elected with 53% of the votes in February 2019, President Nayib Bukele defeated the candidates of the two traditional parties: the Frente Farabundo Marti para la Liberacion nacional (FMLN) of the outgoing President S. Sanchez Cerén, and the opposition party Arena. Following a campaign focused on the fight against corruption, Mr Bukele took office on June 1, 2019. During his first months in office, he made major political announcements on Twitter, bypassing traditional media. His first decisions mainly concerned security, with the implementation of a national territorial plan to fight gangs and facilitate social cohesion, which was unanimously adopted by parliament. The rest of his political agenda remains uncertain, particularly for economic reforms, while attempts to form a coalition supporting his programme in parliament have so far been unsuccessful. Indeed, the legislative elections of March 2018 (three-year legislative cycle), saw Mr Bukele's party, Gran Alianza por la Unidad Nacional (Gana), win only 11 seats out of 84, with the majority of seats being held by Arena. Alliances with the main parties, Arena and FMLN, will therefore be necessary to pass any new legislation, posing the risk of a new political deadlock.

From the point of view of diplomatic relations, beyond the leading partnership with the United States, El Salvador's foreign policy remains oriented towards the sub-region with the entry, in 2018, into the customs union formed by Guatemala and Honduras. A rapprochement with China was also initiated following the end of diplomatic relations with Taiwan in August 2018 and a stated desire to increase economic cooperation between the two countries.

 

Last update : August 2019

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