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EL SALVADOR
1. General trends
The GDP of El Salvador increased by 1.5% in 2011, just 0.1 percentage points more than the previous
year. This reflects the decline in agricultural production, which was exacerbated by the adverse effects of
tropical depression 12-E towards the end of the year.
Higher international commodity prices, particularly for food and energy, caused consumer
inflation to pick up, so that year-on-year prices were up by 5.1% at the year’s end, a significantly larger
rise than the 2.1% seen in 2010. Although exports of some commodities, coffee in particular, benefited
from the increase in international prices, higher prices led in the aggregate to a worsening of the current
account balance, with the deficit rising from 3.1% of GDP in 2010 to 5.3% in 2011.
Although the deficit of the non-financial public sector (NFPS), including pensions and trust
funds, narrowed from 4.3% to 3.9% of GDP, this was not enough to meet the target agreed with the
International Monetary Fund (IMF) of a deficit equivalent to 3.6% of GDP. In the sphere of
macroprudential policy, the most significant development was the implementation of legislation making
the central bank solely responsible for financial system regulation and the Financial System
Superintendency (SSF) for supervision. The development banking act was passed in September and will
come into force in 2012, and the Law of the Central Reserve Bank of El Salvador was amended at the
start of the year with a view to enhancing the Bank’s role as lender of last resort.
2. Economic policy
(a)
Fiscal policy
Economic activity, administrative improvements and the effects of the tax reform approved in
December 2009 resulted in tax pressure reaching its highest level in 20 years, equivalent to 13.9% of GDP
(13.4% of GDP in 2010). While the capital spending of the NFPS fell by 6.1% in real terms to 2.9% of
GDP, current spending rose by 4.7% in real terms to 18.4% of GDP (0.4 points of GDP more than in 2010).
This was mainly due to the introduction of measures to protect low- and middle-income sectors
from the impact of rising food and fuel prices. These measures included the introduction of temporary
consumer energy subsidies and lower thresholds for the natural gas subsidy. Consequently, despite the
reduction in the NFPS deficit the fiscal result was a deficit that exceeded the 3.6% of GDP agreed with
the IMF, which could compromise access to multilateral financing in 2012.
Most of the fiscal deficit was financed from external resources, with multilateral financing chief
among them. Although NFPS debt as a proportion of GDP fell slightly from 45.1% to 44.3% in 2011,
total public debt expanded from 55.5% of GDP in 2010 to 56.2% in 2011, and this reflects borrowing by
the financial public sector, whose debt rose from 9.1% of GDP in 2010 to 11.3% in 2011. This was
chiefly the result of an increase of over US$ 400 million in the Pension Trust Fund (FOP).
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To strengthen tax collection capacity, a Vice-ministry of Revenue was created within the Ministry
of Finance in May to coordinate the customs, internal revenue and treasury departments. In late 2011, the
legislative assembly passed a new tax reform whose main elements are: (a) an increase in the top rate of
corporation tax from 25% to 30%, applicable to firms whose annual profits exceed US$ 150,000, (b) the
introduction of a minimum tax rate of 1% of gross earnings for firms reporting two consecutive years of
losses, (c) an increase from 1.5% to 1.75% in the monthly advances on personal and corporate income tax,
and (d) a cut from 10% to 5% in the tax on dividends paid or credited. According to official estimates, these
measures should raise an extra US$ 150 million or so (0.6% of GDP) between 2012 and 2013.
(b)
Financial and macroprudential policy
In the financial sphere, although nominal rates held fairly steady, resurgent inflation meant that 6month deposit rates were negative over the year in real terms, while the annual lending rate for credits of
up to 12 months averaged just 0.8%, turning negative during the third quarter.
This situation led to a drop of 2.5% in the M2 monetary aggregate, allowing banks to reduce
surplus liquidity from an average of US$ 213 million in 2010 to an average of US$ 130 million in 2011.
The drop in lending rates had a positive impact in the form of 3.7% growth in lending to the private
sector, with a particularly strong recovery in lending to manufacturing, commerce and services excluding
transport and communication.
Where macroprudential policy was concerned, 2011 saw implementation of the legislation
making the central bank the sole regulator of the financial system and the SSF its sole supervisor, so that
the latter now exercises the powers of the old financial, securities and pension system superintendencies.
The Law of the Central Reserve Bank of El Salvador was also amended to enhance its ability to
act as lender of last resort. Money deposited by financial institutions in the current legal reserve fund was
used to set up a liquidity fund, equivalent to 3% of deposits, that will provide contingent resources to
solvent banks that have depleted their own liquidity reserves. In addition, a vehicle is being created to
provide emergency liquidity to banks that have already accessed this fund.
As things stand, 8% of deposits are expected to be covered within four years. Financing for these
facilities will come from the central bank’s holding of government debt and from contingent credit lines
with the international banking system. The planned mechanism for the provision of liquidity is the use of
repurchase agreements involving government debt, and the possibility of the central bank temporarily
acquiring bank assets has been left open.
Lastly, the development banking act was passed in September 2011. This created three
investment vehicles designed to promote the country’s productive development: (a) the National
Development Fund, which will provide credit to micro, small and medium-sized enterprises in labourintensive sectors, (b) conversion of the Multisectoral Investment Bank into the Development Bank of El
Salvador, which will supply long-term credit to strategic production sectors, and (c) the Salvadoran
Guarantee Fund, which will support small businesses. With the aim of reducing the risk of fiscal
contingencies, these vehicles will be subject to the same prudential measures as apply to the rest of the
Salvadoran banking system, which means that the rates charged must reflect operating costs and any
guarantees granted will be treated for accounting purposes as part of the overall public debt.
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3. The main variables
(a)
Economic activity
Despite 2010 ending with a slight upturn in economic activity, the Salvadoran economy began to
slow in the second quarter of 2011. GDP expanded by 1.5% over the year as a whole.
The most striking development was the slowdown in consumption growth, which dropped from
2.8% in 2010 to 2.3% in 2011, as this occurred in a context of rising formal employment and a substantial
increase in remittance flows. This slowdown was offset by the dynamism of investment, which grew by
11.2% after managing just 2.4% in 2010.
The reduced dynamism of consumption led to a drop of half a percentage point in the volume
growth of goods and services imports, which expanded by 10.9%. Goods and services exports,
meanwhile, rose by 9.3% in real terms (as against 11.6% in 2010).
While manufacturing growth was much the same as in 2010 at 2%, the private-sector
consumption slowdown reduced growth in the commerce sector from 1.5% in 2010 to 0.7% in 2011. The
agricultural sector began contracting at the start of the year and was then heavily affected by the storms
associated with tropical depression 12-E during October. The decline in activity in the sector (3.8%,
compared to 3.1% the year before) was not fully offset by the recovery in the construction sector (8.6%
growth compared to 5% in 2010), which has benefited from public investment in residential construction.
(b)
Prices, wages and employment
The switch to a targeted natural gas subsidy for consumers in April 2011 produced a significant
jump in 12-month inflation, from 2.7% in March to 6% in April. After peaking at 6.8% in August,
consumer price growth began to moderate thanks to lower inflation for foods and non-alcoholic
beverages. Consequently, year-on-year inflation ended the year at 5.1%. While three percentage points
above the previous year’s figure, this rise in inflation was less than expected, as prices for agricultural
products had been expected to increase by more following the losses inflicted by the storms in the latter
part of the year.
The total number of contributors to the Salvadoran Social Security Institute (ISSS) averaged
718,719 over 2011, a rise of 3.3% from 2010 and an increase on the previous peak in mid-2008. The most
substantial increases were in central government (9.2%), commerce (4.6%) and manufacturing (3.5%).
Nonetheless, private-sector formal job creation (accounting for 80% of the total) slowed over the course
of 2011, and the decline accelerated from the third quarter onward.
Where wages were concerned, rising consumer prices caused pay negotiations to be brought
forward and the result was a nominal 8% rise in minimum wages across all sectors, applicable from May.
(c)
The external sector
While exports benefited from higher international sugar and coffee prices and rising demand for
garments in the United States, higher international food and fuel prices and the stronger demand driven by
investment meant that goods and services imports rose even more sharply, with growth in these increasing
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from 15.9% in 2010 to 17.8% in 2011. This led to a pronounced deterioration in the balance-of-payments
current account deficit, which widened from 3.1% of GDP in 2010 to 5.3% in 2011.
As evidence of the modest improvement in employment conditions for migrants of Latin American
origin in the United States, remittance flows, which represent 16% of Salvadoran GDP, rose by 6.3% in
2011 (as against 1.3% in 2010), although this did not prevent the slowdown in private consumption. By
contrast with the situation in 2010, when the flow of foreign direct investment (FDI) represented just 0.5%
of GDP, inflows in 2011 totalled US$ 385.5 million, or 1.7% of GDP. Most of this investment went to the
manufacturing and commerce sectors. By contrast, flows into the financial sector were highly dynamic at
the start of 2011 but had contracted slightly in nominal terms by the end of the year.
The inflation differential with the United States was offset by nominal appreciation of the
currencies of the country’s main trading partners against the dollar, so that its effective real exchange rate
depreciated slightly on average, by 0.9%.
4. Recent trends and prospects for 2012
After indicating a slowdown for much of 2011, in November the economic activity index began to point
to more dynamic GDP growth, a trend which has continued in the data for the first quarter of 2012. This
recovery is being led by agriculture, commerce, and community, social and personal services.
Growth is projected at about 2% for the year as a whole, a scenario premised upon a modest pickup in private-sector consumption underpinned by higher remittance flows, together with investment
growth similar to that of 2011. Growth could be lower, however, if there is no reversal of the declining
trend in formal employment, which contracted by 2.3% in the first two months of 2012, as measured by
total ISSS contributors.
In April, a year on from the withdrawal of the blanket consumer subsidy for natural gas and the
impact this had on inflation, the year-on-year increase in the CPI was 2%. In addition to the statistical effect
of a higher basis of comparison, this result reflects stabilizing prices for food and non-alcoholic beverages.
The effects of higher domestic demand, and the fact that international food and energy prices remain high,
are expected to result in a year-on-year rise in domestic prices of about 3.5% by the end of 2012.
In the external sector, there has been a sharp slowdown in the growth of exports, whose value
increased by just 0.6% (as against 28% in the same period last year) owing to a drop of almost 25% in
coffee exports, the result of a decline in both prices and volumes. Imports grew by 6% in the same period
(as compared to 23.3% in the first quarter of 2011). The sharpest slowdown has been in imports of capital
goods, which might reflect a loss of investment dynamism. Conversely, remittance flows expanded by
8.9% in the first third of the year, double the rate for the same period the previous year. The current
account deficit for the year as a whole is expected to be about 4.5%.
Failure to meet the NFPS deficit target agreed with the IMF has set back the fourth review of the
stand-by arrangement, originally scheduled for mid-March. This situation has made financing harder to
access, forcing the government to moderate current spending, which grew by 4.3% in nominal terms in
the first quarter (as compared to 13.9% in the same quarter of 2011), even though total revenue was up by
over 10% in the same period.
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The result has been a slower rate of increase in overall borrowing (4.3% in the first quarter of
2012, as compared to 16.6% during the same period of 2011). At the same time, there has been a
recomposition of the external debt in favour of domestic debt, which is not only more expensive but
competes for resources in a context of incipient recovery in lending to the private sector.
The most recent letter of intent under the stand-by agreement with IMF (September 2011)
proposed an NFPS deficit target, including pensions and trusts, of 2.5% of GDP (the same as the target in
the 2012 budget). However, there remains the possibility that the deficit target may be revised to 3% of
GDP when the agreement is renegotiated with the IMF, although this would still require a substantial
effort of public spending restraint.