Population 5.945 million
GDP 23.985 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
1.4 |
1.5 |
1.6 |
2 |
|
Inflation (yearly average) (%)
|
1.2 |
5.1 |
2.8 |
3.1 |
|
Budget balance (% GDP)
|
-4.5 |
-4.2 |
-4 |
-3 |
|
Current account balance (% GDP)
|
-3.1 |
-5.4 |
-5 |
-4.8 |
|
Public debt (% GDP)
|
50.1 |
50.8 |
51.8 |
51.7 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Relative economic diversification (preponderance of services and industry over agriculture)
- Economy “dollarised” since 2001
- Prudent economic policy
- Free trade agreements with Central America and the United States (DR-CAFTA), as well as with Mexico and the EU
- Financial support from multilateral institutions
- Strong population growth
WEAKNESSES
- Small size of the economy with few natural resources
- Vulnerability to climate and earthquakes
- Heavy dependence on the United State (exports, foreign direct investments and transfers from emigrants)
- External debt
- Banking system under foreign control
- Inadequate infrastructures
- Large scale inequalities and poverty
- Considerable insecurity linked to drug trafficking
Risk assessment
Weak economic growth, below the regional average
In 2012, despite spending on reconstruction in the wake of the severe flooding caused by a tropical depression in late 2011, the country’s growth remained sluggish. Growth is expected to accelerate slightly in 2013, driven by a rise in consumption (94% of GDP), linked to increased income transfers from expatriate workers. However, weak investment in a very difficult business climate marked by considerable insecurity continues to hinder growth. The economy is likely to benefit from the dynamism of services (60% of GDP), while industrial production, particularly textiles, concentrated in the “maquiladoras”, is expected to suffer again from a still uncertain economic situation in the United States, the main economic partner. Exports (clothing, coffee, sugar, toilet paper, cardboard, medicines) are expected to climb but, since imports will be fuelled at the same time by consumption, the contribution of trade to growth will remain negative. Inflation could increase slightly due to the rise in consumption, but is expected to remain contained due to the persistent moderation of imported energy and food prices.
External accounts vulnerable to American demand and the transfers from migrants
In 2013, exports are expected to benefit from the country’s trade diversification policy, illustrated by the signing of an Agreement of Association between Central America and the EU (in June 2012). This should ultimately make it possible to compensate for American influence but the United States will remain the first destination for exports (45%), before Central America (33%). With import levels for capital goods, oil products, intermediate and food products likely to remain very high (due to weak domestic production), the trade deficit is expected to remain massive. It is to a large extent offset by income transfers from expatriate workers (about 16% of GDP). Dividend repatriations by foreign companies remain limited. Multilateral aid and foreign direct investments, limited due to insecurity and institutional weaknesses, will enable coverage of the remainder and maintenance of a satisfactory level of reserves.
Fiscal consolidation measures difficult to keep to
In 2012, the government had to contend with unexpected spending due to the flooding. The deficit agreed with the IMF (3.5%) as part of the three-year $800-mllion standby agreement (expiring in March 2013) has been exceeded. However, the government has reduced current spending in keeping with its commitments. It is expected to continue doing so in 2013, needing the support of multilateral institutions to fund its ambitious social programmes (education, health and combating poverty and insecurity). Despite the emigration of 20% of the population and the rise in their income transfers, poverty remains. The 2013 budget is likely to be marked by a moderate rise in spending, offset by higher public revenues provided for by the 2011 tax reform. Nevertheless the continuation of substantial subsidies (particularly on petrol) will make it difficult to cut the fiscal deficit and bring it down to its pre-crisis level. Efforts will be just enough to begin reducing public debt, which went off-target with the crisis.
Resurgent political tensions
President Mauricio Funès of the left-leaning Frente Farabundo Marti para la Liberación Nacional (FMLN) was elected for five years in 2009. The FMLN suffered a setback in March 2012 legislative and municipal elections, with 31 representatives, down from 35, while Arena, the party of the right, won 33 seats out of the 84-seat Salvadorian Congress, forcing the President to find short-lived majorities. The political situation became tense in 2012, due to interference by the executive and the legislative in the judiciary. Thus, the President and the National Assembly had to abandon the replacement of judges of the Supreme Court, which were supposed to fight against the effective corruption of justice, following the cancellation of their decision by the same Supreme Court.
The business environment remains particularly difficult due to the violence which reigns in the country (maras). Though the truce signed at the beginning of March 2012 between the country’s two main gangs enabled a significant reduction in the homicide rate, insecurity remains a major issue for the authorities.
