Country Report El Salvador 1st Quarter 2015

Update Country Report El Salvador 01 Dec 2014

Slow growth continues in September

Event

The Índice de Volumen Actividad Económica (IVAE, the monthly activity index) recovered slightly in September, rising by 0.5% year on year. However, accumulated growth was still just 0.8% in January-September.

Analysis

Although a modest rise in growth year on year in September brought an end to two consecutive months of contraction (the IVAE fell by 0.3% and 2.2% in July and August respectively), the Salvadoran economy has clearly been faltering in the second half of the year. GDP rose by 2.1% and 2.2% in the first two quarters and, although GDP data can often differ from the IVAE figures, exports have consistently slackened this year (down by 4.7% between January and October), as has spending on imports (down by 3% year on year)-only partially, owing to a fall in the cost of imported oil. Domestic investment continues to be dampened as another election period approaches early next year.

On the supply side, farming and fisheries were alone in reporting expansion (by 2.8%), while mining fell by 6.6%, construction by 7% and activity in industrial manufacturing flatlined. Despite a strengthening US economy, demand from that country remains slow for the textiles produced by Salvadoran maquilas (local assembly factories for re-export), which appear to be losing their competitive edge against neighbouring exporters in Nicaragua and Guatemala. So far this year, Salvadoran maquila sales (most of which are sold in the US) have fallen by 9% compared with last year.

In contrast, there is a generally positive panorama in the services sector. Nonetheless, the retail, restaurants and hotels sector fell by 1.1% in the first nine months of the year, despite high inward flows of family remittances (totalling US$3.495bn by the end of October), which normally funds higher consumer spending. Resurgent violent crime is possibly having an increasing effect on consumer habits, restricting profit margins, especially in the tourism sector. However, the banking, insurance and financial services sector expanded by 4.4% year on year, real-estate and business services grew by 6.2%, and community and social services by 6.8%. Government services expanded by 1.2% and the utilities sector by 1.7%.

Impact on the forecast

With third-quarter GDP figures out next month and on the strength of the latest IVAE data, we continue to maintain our estimate for growth of 1.8% in 2014.

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