Country Report El Salvador 1st Quarter 2015

Update Country Report El Salvador 31 Oct 2014

Growth continues to falter in August

Event

The Índice de Volumen Actividad Economica (IVAE, the monthly activity index) fell by 2.2% >year on year in August, resulting in accumulated growth of just 0.9% in January-August.

Analysis

After a more positive growth pattern in the first half of the year-with GDP rising by 2.1% and 2% in the first and second quarters, respectively-these latest monthly activity figures suggest the Salvadoran economy has lost its earlier impetus (the IVAE fell 0.6% in July as well). Despite a strengthening US economy, overall exports fell by 2.9% in the third quarter, according to the Banco Central de Reserva (BCR, the Central Bank), while exports from maquila offshore assembly plants (mainly sold in the US market) were down further, by 6.7%, in the same period and 8% so far this year. Concerns over heightened insecurity and the impact of new taxes from September also appear to be impacting domestic-investment levels.

In detail, the supply side showed a mainly negative panorama in the January-August period, with output in mining down almost 8% and industrial manufacturing flatlining with the slowdown in output from the maquilas. The farming and fisheries sector was alone among the best-performing sectors, posting a yearly expansion of 3.3%, despite recent poor weather conditions that have been hampering this year's harvests; meanwhile the construction industry continued in decline, by 6.8%, due to poor investment in housing and large-scale works projects. The outlook for the building trade, in particular, should be improved in the medium term with the recent approval of the second phase of the US millennium funding (known as Fomilenio 2): US$277m disbursed over a five-year period starting in 2015, part of which will be destined for construction works in the coastal areas.

While the main thrust of growth continues to come from El Salvador's services industries, it was not a totally positive picture across the board. Retail, restaurants and hotels, which tend to rely on inward flows of family remittances, fell by 0.4% in the first eight months of the year, while, in contrast, the banking, insurance and financial services sector expanded by 4.2%. Real-estate and business services grew 4.5% and community and social services by 6.5%. Neither of these are, however, large contributors to the overall economy.

Impact on the forecast

GDP figures have been somewhat higher than the IVAE suggests, and, as such, our forecast for GDP growth of 1.8% for 2014 will remain unchanged.

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