Economic Analysis
El Salvador

El Salvador

Population 6,127 million
GDP per capita 4 219 US$
C
Country risk assessment
B
Business Climate
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Synthesis

major macro economic indicators

  2014/15 2015/16

2016/17

(f)

2017/18 (f)
GDP growth* (%) 1,4 2,5 2.4 2.3
Inflation (yearly average) (%) 1,1 -0,7 0.6 0.9
Budget balance** (% GDP) -3,4 -3,2 -2.4 -2.5
Current account balance (% GDP) -5,2 -3,6 -3.4 -3.7
Public debt** (% GDP) 57,1 58,7 59.9 61.1

 

(e) Estimated (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
  • Financial support from multilateral institutions
  • Growing population

WEAKNESSES

  • High level of criminality and insecurity associated with drug trafficking
  • Lack of natural resources
  • Climatic and seismic vulnerability
  • Inadequate infrastructures and investment 
  • Dependence on the United States (48% of exports, 90% of remittances and FDI)
  • Structural fragility of public and external accounts 
  • Significant inequality and poverty

Risk assessment

Growth suffering in negative climate

In 2017, growth will stay moderate, reaching 2.3 %, as in the first quarter (YoY). It will be affected by the national political gridlock and the moderation of the US economy, with which the Salvadorian economy is closely correlated. The weakness of national savings and that of credit growth, as well as the ongoing restrictive fiscal policy are hampering growth. Moreover, consumption suffers from high criminality, but benefits from both increased remittances from workers abroad and low inflation, even if it is increasing since February, The limited purchasing power of households, the lack of natural resources, together with corruption and criminality, will continue to limit private investment. In terms of sectors, growth is likely to be sustained, as in 2016, by manufacturing and agricultural production.

 

Budgetary consolidation blocked by political dissension

With the budget deficit remaining close to subdued 3% of GDP in 2017, the country’s budget situation will remain fragile. Given the growth rate and the weakness of investments, the possibility for the government of using its fiscal options to increase revenues is limited. Furthermore, political disagreements between the government of President Salvador Sánchez Cerén (FMLN, left) and the Legislative Assembly, where his party only holds 31 out of the 84 seats, are blocking the reforms needed to help reduce the deficit. These dissensions are exacerbated by the fact that the FMLN has proven reluctant to adopt the budget consolidation favoured by ARENA (Alianza Republicana Nacionalista), the first power in the Assembly, on the right side of the political spectrum. This legislative weakness kept the government from getting a budget expansion needed to cover an USD57m principal and interest payment to local pension funds, leading to the country’s first default in more than twenty years. The payment was finally made, but the increasing tension between the two powers has raised government debt payment risks. With no deal in sight between the FMLN and ARENA, and as external financing remain limited, spending cuts should continue in order to allow the government to meet its obligations. The perpetuation of the deficit will lead to an ever-increasing level of public debt beyond 60 % of GDP, a worrying level for a dollarized economy.

The current account deficit is expected to widen in 2017. As they are reliant on the health of the US economy (48 % of the total exports), exports are not likely to grow significantly in 2017. At the same time, the slight rise in oil prices will have an impact on imports: the trade balance is therefore likely to remain in deficit. In contrast, the services surplus should improve, and remittances from the Salvadorian diaspora, in particular from the US, will remain important (17% of GDP). The financing of the current account deficit is suffering because of the level of criminality which is deterring FDI.

 

Governance hindered by the lack of a legislative majority

S. Sánchez Cerén (FMLN), elected President in June 2014, faces a number of challenges including budget consolidation and restoring security within the country. However, he is unable to call on support from a majority in the Assembly following the victory of ARENA in the general elections of March 2015. This situation is preventing the urgently needed reforms for budget consolidation, and raising fears of legislative paralysis ahead of the next legislative elections in March 2018. Already accused of high levels of corruption and nepotism, the government is losing support among the population for its budget measures. Murders linked with the country’s gangs are decreasing (-20 % in 2016 compared to 2015, according to official data), in particular because of extraordinary measures introduced in 2016 and extended in February 2017 until 2018 (application of a state of emergency in seven prisons holding the imprisoned gang members, deployment of military in rural areas). Two of the biggest gangs (MS-13 and Barrio 18) expressed their willingness to start negotiations with the government, which has refused at the moment. El Salvador remains the most violent country in the world in 2016 (81.2 murders per 100,000 inhabitants in 2016), and as a result, the business climate has deteriorated significantly.

Although the FMLN maintains historic links with radical left regimes in the region, the President is careful to maintain good relations with the United States, the country’s leading trading partner.

 

Last update : June 2017

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