Ekonomske analize
El Salvador

El Salvador

Population 6.5 million
GDP 4,187 US$
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 2.4 2.4 -8.5 3.0
Inflation (yearly average, %) 1.1 0.1 0.2 1.1
Budget balance (% GDP) -2.6 -3.1 -13.3 -8.4
Current account balance (% GDP) 4.7 -2.1 -4.9 -4.5
Public debt (% GDP) 68.0 69.4 89.0 92.5

(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, the EU and South Korea, 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 (number-one destination for exports and main source of expatriate remittances)
  • Structural fragility of public and external accounts
  • Significant inequalities and poverty

Risk assessment

A recovery that will be highly dependent on the United States

After being harder hit than its neighbours by the pandemic-related recession in 2020, with the exception of Nicaragua, El Salvador is set to experience a rather sluggish recovery that will not be enough to make up the lost ground. As with its neighbours, this is due to heavy reliance on the U.S. economy, but also to public demand, which is limited by the country’s strained financial situation. Domestic demand is mainly based on household consumption (82% of GDP in 2019) for which remittances from expatriates in the United States are an important source of income (21% of GDP in 2019). These expatriates will continue to be more affected by unemployment than other sections of the population, with a rate of 10.3% in September 2020, three percentage points higher than the U.S. national average. As a result, the catch-up effect observed in remittance flows in the second half of 2020 is not expected to continue on a sustained basis, which will limit the strength of these flows. The potential non-renewal of Temporary Protected Status, which allows 200,000 Salvadorans to live legally in the United States, also threatens this source of income. The outcome of this issue, to be decided in January 2021, will be highly dependent on the winner of the U.S. presidential election. Public demand, meanwhile, is expected to be constrained by political tension surrounding the approval of the 2021 budget and growing financing needs, despite the government’s commitments to increase spending on health, education and security. However, a return to greater consensus between the legislature and the executive following the 2021 legislative elections could boost investment in the country. External demand will remain constrained, particularly in the clothing sector, which is being hurt by weaker demand in the United States and Vietnam's entry into the competition. Besides textiles, the manufacturing sector as a whole is set to be affected, especially maquila companies, which are focused on exports and the United States, producing electronic chips and plastic packaging in addition to textiles. Construction is also expected to be affected by the recession. The agricultural sector will remain vibrant, driven by coffee and sugar exports. A resurgence of the epidemic in the country, however, poses a risk to this scenario.

 

Financing needs for public and external accounts

The deterioration in the already fragile public finances was one of the main consequences of the pandemic, with a 20 percentage point jump in public debt relative to GDP in 2020. The 2021 budget provides for a 16% increase in spending compared with FY2020. In the absence of measures to boost revenues, the new financing needs should be covered by debt. The country obtained a total of USD 606 million in multilateral loans from the IMF, the World Bank, the Inter-American Development Bank and the Central American Bank for Economic Integration. However, these loans did not meet all of the government's financing needs, prompting it to go into debt by issuing EUR 1 billion in short-term repayable bonds to finance 2020 expenditures. Repaying this high-interest short-term debt is likely to increase the financial constraints on the government, which is counting on new multilateral loans to cope, as the domestic market is already saturated. An agreement with the IMF to obtain financing is unlikely before the February legislative elections and would be conditional on significant fiscal adjustments. The trade deficit is set to stay high, while exports will continue to be stymied by lower global demand for textiles and clothing, despite brisk growth for agricultural products. Imports are expected to increase, driven by renewed domestic demand. With the income balance still in deficit due to dividend repatriation by foreign companies, expatriate transfers will prove insufficient to balance the current account. Foreign direct investment, mainly from the United States, will remain sluggish in an uncertain global context. The government will therefore also have to finance these external needs through multilateral loans.

 

Will tensions ease between the legislature and the executive?

Since Nayib Bukele came to power at the head of the centre-right GANA party in the February 2019 election, tensions have been running high between the executive and the legislature, which is dominated by the two traditional parties, FMLN and Arena. This situation came to a head on 9 February 2020 when the army entered the National Assembly as the president sought to pressure deputies to fund the fight against gangs. The legislative elections of February 2021 could allow President Bukele to emerge as the winner in the stand-off, with his newly created party, Nuevas Ideas, currently well ahead in the polls (48% support versus 8% combined for Arena and FMLN). A new consensus between the assembly and the president could allow the latter to carry out his reform programme. On the international scene, the president’s cordial relations with the United States could grow more strained again in the event of a victory for Joe Biden. Several voices have already been heard in the U.S. Congress criticising the president's authoritarian turn and calling for U.S. aid to the country to be suspended if reforms are not carried out.

 

Last updated: February 2021

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