El SALVADOR: ECONOMIC AND TRADE UPDATE APRIL 2008

UNCLAS SECTION 01 OF 02 SAN SALVADOR 000419 SIPDIS STATE PASS USAID/LAC STATE ALSO PASS USTR USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EINV ES SUBJECT: El SALVADOR: ECONOMIC AND TRADE UPDATE APRIL 2008 ¶1. Summary. According to Central Bank of El Salvador figures, El Salvador achieved 4.7% GDP growth in 2007, driven by increases in agriculture, the financial sector, retail, and transportation, communications and storage. Inflation remained stable at 4.9%. The current account deficit increased by 66% to $1.1 billion and remittances reached $3.7 billion. Driven by economic growth and continued fiscal reforms, tax revenues increased by 12% during 2007, and the fiscal deficit was reduced from 2.9 to 2% of GDP in 2007, while public debt fell to 38.8% of GDP. While El Salvador hit its target range for growth in 2007, a combination of rising fuel prices, a slowing U.S. economy, and political uncertainty with the 2009 elections suggest a less optimistic forecast for 2008. End Summary. GROWTH & INFLATION -------------- ¶2. According to Central Bank official figures, El Salvador's GDP grew at a rate of 4.7% during 2007. All sectors showed positive growth. The most dynamic sectors were agriculture (8.6%),the financial sector (5.4%),retail (5.3%),and transportation, communications and storage (5.1%). Manufacturing increased by 3.8% and utilities by 2.4%. ¶3. The annual inflation rate for 2007 was 4.9%, the same as 2006. For February 2008, the accumulated inflation rate was 1.9%, compared to 0.9% in February 2007. Inflation in El Salvador's main regional trading partners is putting pressure on domestic food prices such as grains and vegetables. Similarly, higher international prices are affecting domestic prices of corn flour and fertilizers. As a result, in February 2008, food prices alone increased by 1.9%. BALANCE OF PAYMENTS & TRADE -------------- ¶4. In 2007 the current account deficit increased by 66% to $1.12 billion, with family remittances compensating for most of this negative balance in the current account. As of December 2007, family remittances reached $3.695 billion. The trade deficit grew by 15% to $4.1 billion. Total exports increased by 7.4% to $4 billion, while total imports grew by 13.1% to $8.7 billion. ¶5. Non-traditional exports (which exclude coffee, sugar, shrimp and maquila exports) were the most dynamic, expanding by 15.2%. Maquila exports (primarily textiles) increased by only 1.3% and traditional exports (coffee, sugar, shrimp) decreased by 1.1%. Within non-traditional exports, goods exported to the Central American region represented 67% of the total and increased 16.5%. Non-traditional goods exported outside Central America increased by 13%. ¶6. In 2007, total exports to the U.S. increased 2.2% to $2 billion, while the U.S. share of total exports decreased from 53.4% to 50.8%. (NOTE: This was primarily caused by a drop in ethyl alcohol exports in the last two months of the year, driven by low prices and a drop in production because of plant maintenance.) Within Central America, exports to Guatemala grew 15.1%, exports to Honduras increased 10.1%, exports to Nicaragua grew 12.8%, and exports to Costa Rica increased 1.15%. Central America accounted for 34% of total exports. ¶7. Total imports from the U.S. grew by 14% to $3.1 billion in 2007, and the U.S. share of total imports increased from 35.4 to 35.6%. Other important sources of imports after the U.S. are Mexico, Guatemala, China, Honduras, and Brazil. FOREIGN DIRECT INVESTMENT -------------- ¶8. The total Foreign Direct Investment (FDI) stock increased by 39% from $3.7 billion to $5.2 billion in 2007. The financial sector accounted for 80.7% of this increase ($1.2 billion). The maquila sector received 6.9% of the total ($100.6 million),while 4.6% ($66.7 million) went to communications. Panama accounted for 58.1% of total FDI ($841.2 million) (NOTE: Much of this can be attributed to Bancolumbia's acquisition of Banco Agricola, which was done through Bancolumbia's Panama subsidiary. END NOTE) followed by the United States at 34.5% ($499 million). Mexico invested $59.4 million and Costa Rica invested $34.1 million. DEBT AND TAXES -------------- ¶9. Tax revenues increased by 12% to $2.498 billion in 2007 while the SAN SALVAD 00000419 002 OF 002 tax burden grew from 13.8% of GDP to 14.2% of GDP in 2007. Value Added Tax (VAT) revenues increased by 10% to $1.5 billion while income tax revenues grew by 18.4% to $969.6 million. The fiscal deficit was reduced from 2.9% of GDP in 2006 to 2% of GDP in 2007. Public debt was also reduced from 39.7% of GDP to 38.8% of GDP in ¶2007. For 2008, the Ministry of Finance forecast the tax burden to reach 14.6% of GDP and the fiscal deficit to be further reduced to 1.9% of GDP. COMMENT -------------- ¶10. El Salvador successfully reached government growth projections of 4.5 to 5.5 percent in 2007, and the inflation rate remained stable despite unfavorable external factors like higher oil and food prices. For 2008, however, the combination of projected higher fuel and food prices, a U.S. economic slowdown, and political uncertainty with El Salvador's January and March 2009 legislative and presidential elections threaten growth prospects. The Government has already cut its 2008 GDP estimate down to 4 to 5 percent, and some analysts, including the World Bank, are projecting growth of less than 4 percent. END COMMENT. Glazer