Preliminary Overview of the Economies of Latin America and the Caribbean • 2009 99

El Salvador

The international financial crisis had a devastating effect on external demand in El Salvador,

as well as on remittances and FDI. Uncertainty surrounding the legislative and presidential

elections held at the beginning of 2009 impacted consumption and investment. Given the

general slowdown in economic activity, ECLAC estimates that GDP decreased by 2.5% in

2009, with per capita GDP falling by 3%. The flooding at the end of the year had a minimal

effect on economic activity.

Although 12-month inflation was negative up to October amount equivalent to five percentage points of GDP to reach
2009, inflation for the year as a whole is expected to come 45% of GDP. It is then expected to continue increasing
in at around 0.5%. Given the worsening situation of public and to peak at 50% of GDP in 2011. Thus, in mid-2009,
finances, a deficit of 5.5% of GDP is projected for the non- both Standard and Poor’s and Fitch Ratings lowered their
financial public sector (including pensions), 2.4 percentage ratings for El Salvador’s sovereign debt. Nevertheless,
points higher than in 2008. Owing to the sharp decline in at the end of November, the country issued bonds in the
imports, the current account deficit is expected to reach international market for close to US$ 800 million, which
approximately 2% of GDP, down from 7.6% in 2008. For will be used to pay down short-term debt.
2010, ECLAC is projecting a moderate recovery, with both Greater risk aversion on the part of Salvadoran
GDP growth and inflation at 2%, a current account deficit commercial banks meant that loans to the private sector
of 3% of GDP and a non-financial public sector deficit decreased by 5% in real terms. Banks took advantage of
(including pensions) of 4.5% of GDP. available liquidity to almost halve their external debt, as
In regard to public finances, the government faced well as to improve the time profile of their risks.
a difficult situation. While income tax receipts grew by
2.5%, value added tax (VAT) receipts declined by 14.7%
owing to the economic slowdown. As a result, the central EL SALVADOR: GROWTH and Inflation
government’s current revenues fell by 12%. On the
expenditures side, wage payments rose by 10%, while 6
9
investment fell by nearly 5% after having increased by 5
nearly 30% in 2008. A deficit of 5.5% is projected for the 4 7
Inflation, 12-month variation
GDP, four-quarter variation

non-financial public sector, including the broader public

3 5
sector and pensions.
2
In light of this situation, the government had to 3

renegotiate the terms of its foreign-loan agreements, and 1

1
throughout the year treasury bills were used intensively 0
-1
to cover current expenditures. At the end of September -1
the government announced that it intended to sign a new -2 -3

precautionary loan agreement with the International -3 -5

Monetary Fund for US$ 800 million, with a term of
1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

3 years. This would replace the agreement signed by the 2007 2008 2009
previous government in January 2009. GDP Inflation
The total debt of the non-financial public sector in
2009, including pensions, is estimated to swell by an Source: Economic Commission for Latin America and the Caribbean (ECLAC), on
the basis of official figures.
100 Economic Commission for Latin America and the Caribbean (ECLAC)

Economic growth slowed in practically all sectors, EL SALVADOR: MAIN ECONOMIC INDICATORS

with the exception of government services. The slump in 2007 2008 2009 a
manufacturing and trade, triggered by the sharp drop in Annual percentage growth rates
foreign and domestic demand, had the largest impact on Gross domestic product 4.7 2.5 -2.5
overall growth. Although economic activity was low and Per capita gross domestic product 4.2 2.1 -3.0
Consumer prices 4.9 5.5 -1.6 b
growth remained negative, the slowdown moderated during Real minimun wage 2.5 0.2 9.3
the second half of 2009. At the beginning of November, Money (M1) 16.5 1.6 1.7 c
Real effective exchange rate d 1.2 1.0 -4.5 e
the central part of the country was hit by floods caused by Terms of trade -0.9 -2.8 7.9
hurricane Ida. Though some municipalities suffered severe Annual average percentages
damage, the overall impact was mild. As a result, the decline Urban unemployment rate 5.8 5.5 ...
in GDP in 2009 is projected by ECLAC to be 2.5%. Central government
overall balance/GDP -0.2 -0.6 -2.3
As far as spending is concerned, gross domestic Nominal deposit rate 4.7 4.2 4.7 f
investment dropped by 14.5% owing to the tighter credit Nominal lending rate 7.8 7.9 9.4 f
conditions described earlier and the significant reduction in Millions of dollars
FDI flows. At the same time, private consumption fell by Exports of goods and services 5 169 5 652 5 334
Imports of goods and services 9 564 10 629 8 659
approximately 10% on account of the reduction in remittances Current account balance -1 221 -1 682 -524
and the worsening situation in the job market. Capital and financial account balance g 1 502 2 016 644
Up to August, the number of workers contributing Overall balance 280 334 120

to the Salvadoran Institute of Social Security declined Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the
by nearly 20,000 (6.7%). The worst-hit sector was basis of official figures.
a Preliminary estimates.

construction, where nearly 30% of jobs were lost. Given b Twelve-month variation to October 2009.
c Twelve-month variation to September 2009.
the low levels of inflation, real minimum wages increased d A negative rate indicates an appreciation of the currency in real terms.
e Year-on-year average variation, January to October.
by around 9% in 2009 compared with 2008, when they f Average from January to October, annualized.

rose by barely 0.2%. g Includes errors and omissions.

Beginning in the third quarter of 2008, the drop in

international prices for commodities led to a pronounced
slowdown in the food and beverages and transportation
components of the consumer price index. Consequently,
inflation plummeted, with prices falling by 1.6% in the goods and services is expected to shrink by more than
12 months leading up to October and by 0.7% in relation US$ 1.7 billion to US$ 3.325 billion (14.9% of GDP).
to December 2008. Prices are expected to rise again in the In contrast, the income account deficit is expected to
final months of the year in comparison with those seen widen slightly. Remittances, which represent 16% of GDP,
at the end of 2008. Thus, in December, the 12-month declined by around US$ 400 million. Thus, the current
inflation rate is expected to be around 0.5%. account deficit is estimated to have contracted from more
Exports of goods decreased by approximately 15%. than US$ 1.2 billion to US$ 418 million (2% of GDP).
Two thirds of the decline is attributable to the fall-off in FDI inflows to El Salvador in 2009 are estimated to have
exports from the maquila industry and the remaining third dropped by approximately US$ 700 million, while total
to declines in non-traditional exports, with traditional remittances have amounted to barely US$ 88 million over
exports remaining at a level similar to that of 2008. As a the course of the year.
result of the severe contraction in domestic demand, as For 2010, a moderate revival is projected for both
well the approximately 50% drop in the oil bill, imports foreign and domestic demand, meaning that once again
of goods are estimated to have fallen by about 25%. In net exports will be in the negative range. Although the
terms of volumes imported, the main reductions were in flow of remittances is expected to increase, this will not be
imports of durable consumer goods and capital goods. sufficient to prevent a slight increase in the current account
Thus, for the year overall, the deficit of the balance of deficit, which is estimated to reach 3% of GDP.