El Salvador’s 2008 Article IV Consultation examines the country's economic developments and policies. In 2007, the fiscal position improved, the public debt-to-GDP ratio declined, and economic growth reached its highest level in a decade. The rise in global commodity prices has also generated substantial inflation pressures. The stock of bank deposits has stagnated relative to end-2007, while deposit rates have increased slightly. Interbank repo rates have also risen recently, reflecting tighter funding conditions, and banks have increased their external borrowing, in part to build up liquidity.
November 12, 2008
1. This statement reports on developments since the issuance of the staff report for the 2008 Article IV Consultation. It does not change the thrust of the staff appraisal.
2. Recent data releases and financial market developments point to a continued economic slowdown and moderation in inflation, but there has been a slight uptick in export and remittance growth.
The monthly index of economic activity grew 3.5 percent in the year to August, decelerating from a 3.8 percent pace in July, with manufacturing, financial, and tourism-related industries all softening.
Inflation moderated to 7.4 percent y/y in October, from 8.7 percent in September, owing to the global downturn in commodity prices.
Remittances rose 4.7 percent in the year to September after increasing 4.4 percent in the year to August, but remain below the 5–6 percent rate of growth seen earlier this year.
Export and import growth ticked up slightly in the year to September, to 16.3 percent and 16.8 percent (from 15.8 percent and 16.1 percent in August, respectively).
Sovereign spreads remain at almost 700 basis points, up by 300 basis points since early October and 80 more basis points than the average increase in Latin American spreads.
3. The latest downward revision to the global outlook is expected to weigh on growth in 2009, projected now at 2.0 percent, down from 2.6 percent in the staff report.
4. Lower commodity prices and slower growth in domestic demand than previously forecast are expected to reduce inflation and cut the current account deficit. End-period inflation is now estimated at 7.5 percent in 2008 and 5 percent in 2009—previously at 9 and 6 percent, respectively. The current account deficit is now projected at 5.5 percent of GDP in 2008 and 3.4 percent of GDP in 2009, from 6.1 and 5.4 percent of GDP in the staff report.
5. The government has moved to buttress its short-term liquidity position. An agreement was reached with the opposition party, leading the Salvadoran congress to authorize the government to negotiate $950 million in World Bank and IDB loans; $650 million would be used to repay the sovereign bond maturing in 2011, with the other $300 million to fund various social expenditures. A second congressional vote would be required to approve the borrowing once the loan agreements have been finalized.