Economic studies
El Salvador

El Salvador

Population 6.6 million
GDP per capita 3,922 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 2.3 2.5 2.3 2.0
Inflation (yearly average, %) 1.0 1.1 0.8 1.0
Budget balance (% GDP) -2.4 -2.5 -3.1 -3.2
Current account balance (% GDP) -1.9 -4.8 -4.9 -5.0
Public debt (% GDP) 67.3 67.1 68.3 69.1

(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; member of 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 (first destination of exports and main source of expatriate remittances)
  • Structural fragility of public and external accounts
  • Significant inequalities and poverty

Risk assessment

With no other drivers, the US slowdown will dampen the economy

Given its very high dependency on the US economy, El Salvador will suffer in 2020 from the consequences of the pronounced economic slowdown in the United States. After falling initially in 2019, sales of textile products, the main export to the United States, are expected to decline again, while the crisis in Nicaragua will continue to affect sales of packaging and plastic products. In this environment, the main growth driver will be domestic demand and specifically household consumption in a context of very low inflation linked to full dollarization of the economy. However, household consumption will be less vigorous due to the slowdown in expatriate remittances (18% of GDP) from the United States. After soaring in 2017 and 2018 (+11% in 2017), remittances have been growing at a slower pace since 2019. The extension of Temporary Protected Status until January 2021 gives the 200,000 Salvadoran immigrants living in the United States under this status some time to find another way to stay in the country legally. Investment, which is mainly concentrated in the manufacturing and commercial sectors, will remain low, constrained by a very high crime rate and a deficient business environment. The lack of visibility on the reforms planned by President Nayib Bukele, who took office in June 2019, has not increased investor optimism. On the supply side, coffee is expected to drive up agricultural production, thanks to higher prices supported by a decline in Brazilian production. The recovery in sugar prices should also benefit the sector, which will nevertheless remain highly vulnerable to weather conditions.

 

Rising debt service and a widening trade deficit

The 2020 budget, the first major economic measure by the new administration, forecasts a primary surplus of 0.9% of GDP, which will not be enough to offset the larger debt service burden, thus widening the overall public deficit. This budget should be more transparent thanks to the elimination of discretionary spending, an expense item previously used by the administration without accountability. An 11% share of the new budget will be financed by issuing new debt, for which parliamentary approval will be required. However, El Salvador’s Parliament is highly divided. The external debt of the non-financial public sector represented 35.4% of GDP in 2018, which is a significant amount for a fully dollarized economy like El Salvador.

The trade deficit, which is already substantial (20% of GDP), is expected to widen further with the decline in exports to the United States and Nicaragua, and more muted levels of activity among the other regional partners. However, this movement will be mitigated by lower oil prices and a slower domestic expansion, which will limit imports. The income balance will also in deficit due to the repatriation of dividends by foreign companies that is not fully offset by expatriate remittances. The current account deficit should hence widen in 2020. Foreign direct investment, mainly from the United States to the manufacturing and information and communication sectors, will be too low to offset this external financing requirement. The government will therefore have to rely on market-based financing through bond issuance, as well as on international donors.

 

Nayib Bukele, minority rule leaves little hope of change

Elected with 53% of the vote in February 2019, Nayib Bukele defeated the candidates of the two traditional parties, the Frente Farabundo Marti para la Liberacion nacional (FMLN) of the outgoing President Salvador Sánchez Cerén and the opposition party Arena. Following a campaign strongly focused on the fight against corruption, President Bukele’s first decisions mainly concerned security, with the establishment of a national territorial plan to fight gangs and promote social cohesion, which was unanimously supported by Parliament. The remainder of his political agenda remains uncertain, particularly from the economic point of view, while his attempts to form a coalition that will support his programme in Parliament have so far been in vain. In the legislative elections of March 2018 (three-year legislative cycle), President Bukele's party, Gran Alianza por la Unidad Nacional (Gana), won only 11 seats out of 84, with Arena taking the majority of seats. Alliances with the main parties, Arena and FMLN, will therefore be necessary to pass any new legislation, raising the risk of more deadlock.

In terms of diplomatic relations, dealings with the United States will focus mainly on immigration, after the Trump administration obtained the signature in September 2019 of a cooperation agreement on this subject of which the exact content remains unclear. The rapprochement with China, which has been underway since August 2018, is expected to continue.

 

Last update : February 2020

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