UNCLAS SECTION 01 OF 02 SAN SALVADOR 000419
STATE PASS USAID/LAC
STATE ALSO PASS USTR
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
E.O. 12958: N/A
TAGS: ECON ETRD EINV ES
SUBJECT: El SALVADOR: ECONOMIC AND TRADE UPDATE APRIL 2008
Â¶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
GROWTH & INFLATION
Â¶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%.
Â¶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
Â¶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.
Â¶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
Â¶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
Â¶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
Â¶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
Â¶9. Tax revenues increased by 12% to $2.498 billion in 2007 while the
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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
Â¶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.
Â¶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.